How do you gain from Sebi's investment cap on mutual funds?

MUMBAI: It is not just protection of credit risk, but a regulatory cap on mutual fund investments in housing finance companies that are prompting long term investors to buy cheaper blue chip securities as bond yields have shot up seven to 12 basis points, pushing prices down.

Long to medium term debt investors should see it an opportunity to enter fresh.

Top rated Housing Development Finance Corporation (HDFC) and LIC Housing Finance bonds are yielding higher in the secondary market now. The spread, or gap, between similar rated government-owned companies and them have also widened.

While mutual funds are rushing to offload housing finance company holdings, banks, insurers, and corporates have entered the value buying mode, securing their retail portfolios, or enhancing their corporate earnings.

“The rise in yields (HFC and NBFC bonds) has thrown up an opportunity for fresh investments,” said Badrish Kulhalli, fund manager - fixed income, HDFC Standard Life. “Fundamentally, nothing has changed for these companies, but yields have increased.”

“Investors are seeking a liquidity premium as the buyer segment has reduced slightly,” he said.

For instance, the five-year bonds of those two housing companies are now yielding in the range of 8.52-8.58% compared with about 8.45% or so three days ago.

Similar maturity bonds of government-owned companies such as Rural Electrification Corporation, Power Finance Corp are yielding 8.32-8.33%.

“Amid the recent change in sectoral exposures by SEBI, couple of investors had to recalibrate its portfolio resulting into pressure on yields for housing finance companies,” said said Ajay Manglunia, executive vice-president, Edelweiss Financial. “This has resulted into widening of spreads between triple-A rated public sector company and housing finance company by 10-12 bps in past two-three days.”

Market regulator Sebi has decided to reduce the additional exposure limit provided to housing finance companies in the finance sector to 5% from 10% of net asset value in order to mitigate the risks of mutual funds betting in this sector.

“Banks and insurers are seen buying good quality HFC papers with a liquidity premium as fund houses are trying to offload their holdings in HFCs,” said Ashish Jalan, assistant vice-president at SPA Securities.

But the rise in yields is likely to impact the primary market where issuers may have to offer higher rates to mop up funds from investors. New bond prices are determined in sync with secondary market yields.