Mutual fund exposure to corporate bonds nearly flat in five years

The Rs 50 trillion domestic mutual fund (MF) industry has seen its corporate bond holdings largely stagnate over the past five years.

Actively-managed debt funds, which have the flexibility to invest larger portions of their corpus in corporate paper, were managing Rs 6.73 trillion at the end of April 2019.

Fast forward to last month, their assets had barely grown by 9 per cent to Rs 7.3 trillion. This is despite the overall industry assets under management (AUM) doubling during this period, according to data from the Association of Mutual Funds in India (Amfi). The AUM includes the assets of fixed-term plans and Bharat Bond ETFs, and excludes overnight, liquid, money market and gilt funds.

The AUM of corporate bond-focused MF schemes, however, doesn't accurately reflect investors’ aversion to corporate paper. Many of these schemes also invest in government securities (g-secs), state development loans (SDLs), and money market instruments, which continue to be favoured.

Ananth Narayan, a member of the Securities and Exchange Board of India (Sebi), said at an event earlier this week that the drop in participation is largely due to a loss of investor confidence triggered by the IL&FS crisis and is hurting capital formation. 

“We’ve lost five years of capital formation in the debt markets because people lost trust in the ecosystem,” he said.

 

Besides the IL&FS crisis in 2018, industry players said, other events, such as the shuttering of six credit risk funds by Franklin Templeton MF in 2020, the slump in yields due to interest rate cuts in 2021, the recent change in taxation on debt MFs and the relative attractiveness of equity schemes have dampened investors’ appetite towards debt funds.
 

Fund managers’ preference for sovereign bonds in the recent past has also impacted MFs’ corporate bond investments. G-secs remain the go-to option for duration above five years, a preference accentuated by low spreads between g-secs and corporate bonds until recently.
 

“Our g-sec position is largely driven by our belief that yields are bound to move lower. Thus, we prefer to add longer maturity papers in our funds. G-secs turn out to be our preferred route as corporate bonds for longer maturity are few and illiquid. Moreover, we believe the fall in the yield curve will be driven by higher demand for g-secs. This again makes g-secs more lucrative,” said Sandeep Yadav, senior vice-president, head-fixed income, DSP Mutual Fund.

Most dynamic bond funds, the most actively-managed debt funds, have seen the share of g-secs rise over the past years. For example, Kotak MF’s dynamic bond fund now has a 64 per cent exposure to g-secs compared to 63 per cent in December 2021. Fund houses like Nippon India and Bandhan have been managing dynamic bond funds with g-secs alone.

However, corporate bond funds have started getting higher attention, mostly in short-to-medium horizon schemes, as spreads have started to widen.

“Corporate bond spreads have been widening over the past few months in line with our view and these may remain wider at least for the current quarter given the pressure of busy season credit demand and relatively tight liquidity. We are using this period to slowly increase corporate bond exposure in certain funds that have been very overweight government bonds, so far, and where such rebalancing can be done without reducing overall portfolio maturity,” said Suyash Choudhary, head–fixed income, Bandhan AMC.