Government securities back on debt fund managers' radar

Last Updated: Fri, Dec 28, 2012 05:28 hrs

Government securities are back on fund managers' radar. With a high probability of more interest rate cuts since the Reserve Bank of India (RBI) unexpectedly reduced these in April, debt fund managers have increased their exposure manifold in government paper.

In March, funds from the debt category which could find their way into G-secs were a mere 1.26 per cent of total debt assets, at Rs 4,871 crore. This had risen to 6.75 per cent or Rs 38,418 crore in November, show data with the Securities and Exchange Board of India (Sebi).

Income fund heads are optimistic about rate cuts early next year and, so, are putting more money in long-duration G-secs. They believe the next 12-24 months are going to see a downtrend in the rate cycle. It will be advantageous for funds having exposure to G-secs, they say.

Rising deployment of debt assets in G-secs by fund managers
Month Deployment (Rs cr) % of total
Debt AUM
March 4,871 1.26
April 5,888 1.26
May 6,894 1.37
June 7,048 1.48
July 7,174 1.38
August 12,644 2.30
September 18,302 3.68
October 29,125 5.25
November 38,418 6.75
Source : Securities and Exchange Board of India

The bulk of the funds heading for G-secs are for a duration of a year or more. Debt assets were a majority of the sector's assets at Rs 5.71 lakh crore out of its overall assets of close to Rs 8 lakh crore as on November 30.

For instance, gilt funds, which primarily invest in government paper, have been seeing one of the highest inflows in recent times. Even new launches in the segment, like IDBI MF's gilt fund did well, garnering Rs 120 crore.

Sector executives say investors are more aware about debt products and the impact of interest rates. They say more people are coming to gilt funds, as gilts give the maximum credit comfort, being the least credit-risk product. During April-November, net inflows in gilt funds were Rs 1,567 crore against a net outflow of Rs 926 crore during the same period last year.

According to Amit Tripathi, fixed income head at Reliance Mutual Fund, with the expectations that interest rates were likely to decline, one would like to be overweight on duration. "When you do, a higher allocation will go into assets such as government securities and AAA public sector bonds, among others. These not only provide a duration exposure but are also fairly liquid for you to manage that duration efficiently," he told Business Standard.

Investment heads say adding duration in debt portfolios will help investors. Many believe that in the coming year, as equities markets continue to look uncertain, asset allocation towards the debt category would find traction. Bank certificates of deposit remained the dominant instrument for debt investments. About 32 per cent of debt assets or Rs 1.83 lakh crore were pumped in to buy banks' certificates. Public sector bonds could corner around 5.5 per cent of debt assets.

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