Riding on expectations of interest rate cuts, the mutual fund industry's income funds segment emerged a winner in the quarter ended December. Quarterly average assets under management (AUM) more than doubled quarter-on-quarter, rising a whopping 111 per cent to Rs 33,563 crore. The average maturity period of this category hit a three-year high of 8.4 years.
A Crisil report said this was the highest gain in AUM in the category in eight quarters. “The rise in AUM of Rs 17,702 crore was mainly due to inflows from high net worth individuals and corporates, in anticipation of a reduction in interest rates from the Reserve Bank of India in its monetary policy on January 29,” the report said. The funds are those covered under the Crisil Mutual Funds Rankings.
Heads of fixed income funds said this financial year, there was huge interest for income funds among investors, as rate cut expectations were high. Bond prices (fund net asset values) and yields are inversely proportional; a fall in interest rates results in a rise in bond prices and a positive impact on long-term debt fund returns. Through the quarter ended December, the yield on the 10-year 8.15 per cent benchmark government bond eased 10 basis points to 8.05 per cent. As on January 24, the yield on the 10-year bond fell to 7.88 per cent, the report said.
Income funds increased their maturity, as portfolios with higher maturity would earn higher returns in a scenario of falling interest rates. Crisil Mutual Fund Rank 1 schemes (which indicate good performance) managed their maturities aggressively, with average maturity of 12.32 years during the December quarter.
Another portfolio trait seen in the category was increased exposure to government securities and reduced allocation to certificates of deposit and commercial papers. In the quarter ended December, allocation to government securities rose to 46 per cent, compared with 24 per cent in the previous quarter. Through the December quarter, the category also delivered 2.39 per cent absolute returns. Fund managers have been advising investors to add duration in their debt portfolios to avail of the benefits of an expected rate cut. Many believe in the coming 12-24 months, the cycle of rate cuts would continue and investors should position themselves to reap better returns. In the last few months, gilt funds, or funds that primarily invest in government securities, saw a surge in inflows. In three months, investors pumped in Rs 3,000 crore into these schemes.