Debt mutual funds prosper in wake of Interim Budget yield decline

Gilt and dynamic fund investors reap nearly Rs 330 crore in gains, reveals estimates

The slump in yields after the Interim Budget has led to significant mark-to-market gains for debt fund investors. While gilt funds saw the value of their holdings surge by 0.65 per cent on average on Budget Day, the net asset value (NAV) of dynamic bond funds registered an average increase of 0.51 per cent, according to data from Value Research. The lower-than-anticipated borrowing plan announced in the Interim Budget (on February 1) led to an 8-basis-point decline in the 10-year government bond yield to 7.04 per cent on Thursday.

The debt market sentiment was buoyed by the government’s gross borrowing plan of Rs 14.1 trillion for 2024-25 vis-à-vis Rs 15.43 trillion estimated for the current financial year (2023-24).

Any decline in yields leads to mark-to-market gains for bond and debt fund investors.

Gilt funds and dynamic bond funds were managing a total of Rs 26,100 crore and Rs 30,860 crore, respectively, at the end of December 2023.

Going by the average rise in NAV, these schemes logged gains of around Rs 327 crore on Thursday.

Other schemes like corporate bond funds and banking and public sector undertaking funds saw a modest rise of around 0.15 per cent.

Dynamic bond funds, which allow investors the flexibility to invest across corporate and government securities (G-secs) depending on the market 

scenario, were able to capture the decline in G-sec yields owing to their overweight position on G-secs.

At the end of December, dynamic bond funds had allocated over 68 per cent of the corpus to G-secs on average. In comparison, the corporate bond exposure stood at just 24 per cent. “A further drop in yields is expected due to flows from foreign institutional investors and the expectation of India’s rating upgrade,” said Murthy Nagarajan, head of fixed income at Tata Asset Management.

“The bedrock of this Interim Budget comes from the conservative numbers of a government that’s confident of uplifting India’s long-term growth in a non-inflationary way. We expect the benchmark yield to trend towards 6.5 per cent,” said Kaustubh Gupta, co-head of fixed income at Aditya Birla Sun Life Asset Management Company.

However, from a portfolio point of view, fund managers say they are looking to raise their corporate bond exposure. Some fund managers say they are looking to rebalance the allocation between G-secs and corporate bond funds in schemes that had gone overboard on G-secs.