Debt MFs' allocation to government papers hits 13-month low

Since the second half of FY16, fund managers cut exposure to G-Secs by over 350 basis points

India's debt fund managers, who manage assets worth Rs 10 lakh crore, have reduced exposure to government papers to a 13-month low. With an expectation of further cuts in Reserve Bank of India (RBI)'s repo rate only after a quarter period, they have shifted to corporate bonds from government securities or G-Secs to protect their portfolio.
 
Since the beginning of the second half of FY16, fund managers have cut allocations to G-secs by over 350 basis points. The exposure slipped from a high of 15.99% in September, 2015 to 12.44% in April, 2016 – data from the market regulator Securities and Exchange Board of India (Sebi) suggests. One basis point is one-hundredth of a percentage point.

 
In absolute numbers, of the total debt assets about Rs 1.22 lakh crore is in G-secs against a high of Rs 1.42 lakh crore last year when rate cuts looked imminent.
 

Sujoy Das, head of fixed income at Invesco Mutual Fund, says, “The credit spreads have widened to around 70 basis points (bps) over sovereign bonds. This makes credit papers attractive compared to gilts. The gilts' curve is flat beyond 15-20 years, making long gilts unattractive.”
 
The gilt mutual funds primarily invest in G-Secs. The category average return of the gilt short term funds in the last three months stood at 3.47% while the one year return is quite higher at 9.41%. On the other hand, medium and long term gilt funds have offered a return of 5.5% in the last three months while their one year average return stands at about 7.9%, as on May 27.

 
According to Murthy Nagarajan, Head- Fixed Income at Quantum AMC, "Mutual Funds expect interest rates to be range bound as April CPI inflation  is 5.39 per cent and it is expected to remain above 5 per cent till September. Fund managers normally increase the maturity of the fund by buying G-Sec to take advantage of fall in interest rates.
 
However, with no immediate rate cuts being foreseen amid some global uncertainty given the fact that crude prices have climbed up; fund managers have taken a call to cut allocation to government papers to protect the portfolio.
 
"Global uncertainty has increased due to Brent crude prices trading at 50 dollars per barrel. Economic data has been strong in the US due to core inflation touching 2 per cent levels and unemployment coming at 4.7 per cent for the month of April. RBI is expected to closely watch the monsoon and the effect it would have on vegetable prices and pulses before it cut its  benchmark repo rates. Given these uncertainty, market expectation of repo rate cuts have shifted to August 2016. To protect portfolio and to earn higher accrual income fund managers have shifted from Government securities to corporate bonds," adds Nagarajan.

 
Currently, mutual fund sector offers 41 gilt funds with an overall asset size of Rs 16,123 crore - one per cent of industry's total asset under management (AUM).