Mutual funds' exposure in government securities reaches record levels

G-secs account for 12.1% of debt AUM, up from 6.2% last year

India’s debt mutual fund managers seem to have taken a liking for the government paper. The exposure of debt funds to government securities (G-sec) reached record levels in February amid surprise rate cut by the Reserve Bank of India (RBI).

G-secs accounted for 12 per cent of the total debt assets under management (AUM) as on February 28, 2015 - the highest since data was made available by the Securities and Exchange Board of India (Sebi). A year ago, g-secs accounted for only 6.2 per cent of debt AUMs.

MFs have pumped in around Rs 1 lakh crore in g-secs against total debt AUM of Rs 8.22 lakh crore. Bulk of the g-sec assets are in papers with maturity of one year and above.

According to fund managers, they are investing in longer duration debt paper to reap the benefits of a reversal in the monetary policy stance. Fund managers say fixed-income products with high duration — between three and five years or more — are poised to benefit the most.

R Sivakumar, head of fixed income and products at Axis Mutual Fund, said: “Mutual fund houses were already sitting in long duration. We continue to remain positive on rates. Five-to-six years is the duration we are carrying across the portfolio. We continue to expect that inflation will be on the lower side and RBI, therefore, may cut rates further. We anticipate that bond yields will continue to drop, while another 50 basis points rate cut is on the cards in 2015.”

Bond yields and prices move in opposite directions. A fall in yields boosts returns for debt schemes, as it results in capital appreciation. The yield on the benchmark 10-year government security has come down from nine per cent levels during the start of the financial year to 7.77 per cent at present.

Experts say there can be further downward movement if interest rates are eased. A global drop in oil and commodity prices has raised expectation that interest rates and, thus, G-sec yields could be headed downward for the long term.

Ramesh Rachuri, vice-president and head of fixed income at Peerless Mutual Fund, said: “After the Budget, given the macro-economic situation, we have increased duration. We are sitting on 7-9 year duration in flexible income funds, which is our long duration fund. We started scaling duration after September. Before this time’s Budget, the duration was 5-7 years. We expect one more rate cut before June.”