Over a tenth of debt AUM in gilt funds

India’s debt mutual fund managers are allocating more and more to Government Securities or G-Sec amid expectations of further rate cuts by the RBI. 

Exposure of overall debt assets under management (AUM) to government papers surpassed 11% last month, the highest in a year. At the beginning of the current financial year, the exposure was 6.24%.

This is the third time in last few years that fund managers have put over one-tenth of the debt assets in gilt funds. 

In absolute terms, the AUM in gilt funds (which invest in G-Sec) stood at Rs 81,811 crore, according to statistics available from Sebi. This is probably the highest in absolute figures for many years now. As on 31 December, 2014, average debt AUM stood at Rs 7.39 lakh crore.

Interestingly, nearly 94% of gilt AUM is in funds with tenure of at least one year or more. 

A global drop in oil and commodity prices has raised expectation that interest rates and, thus, G-sec yields could be headed downwards for the long term.

“The drop in international oil prices will benefit all oil importing countries, especially India. The decline in consumer inflation appears sustainable, given the long-drawn pricing cycle of commodities. Benign inflation over the next few years will lead to lower interest rates in the future,” said Sujoy Das, head of fixed income, Religare Invesco MF.

Most fund managers have been opting for longer duration debt papers, as these are likely to benefit the most from a reversal in the monetary policy stance. Fund managers say fixed-income products with high duration — between three and five years — are poised to benefit the most.

“Investors should consider investing in long-duration gilt and income funds to benefit from falling interest rates over the next few years,” added Das.

Fund managers have been advising investors to add duration to their existing investments in debt products. According to them, from a 6-month to 18-month perspective, fixed income products can deliver double-digit returns.

According to Rahul Goswami, chief investment officer (fixed income) at ICICI Prudential AMC, “We continue to run high-duration debt across schemes and believe the time is right for investors to continue building duration in their portfolios.”


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