Income Funds' AUM hit 3-year high of Rs 4.22 lakh crore

MUMBAI: Income funds' assets under management have hit a near three-year high of Rs 4.22 lakhcrore in April, according to data from Amfi, a mutual fund industry body, as money managers are betting on the current tight liquidity situation and easing of interest rate cycle.

Banks and corporates have also invested over Rs 26,000 crore in income funds in April. Most of the inflows in this segment have come into short-term and ultra-short term debt funds as fund managers expect the yields of shorter tenure bonds to firm up in the near future due to tight liquidity conditions.

"There is a perception among money managers that the yields of shorter-tenure bonds would firm up in the near future as interest rates are expected to fall over a period of time. Fund managers expect most of the volume concentration to happen in shorter tenure bonds on expectations of higher returns," said Debasish Mallick, managing director & CEO, at IDBI Asset Management, which manages funds worth Rs 7,000 crore.

Long-term debt funds, too, have seen an increase in inflows, led by hopes of fall in rates. Income funds' category includes long-term debt funds, short-term debt funds, fixed maturity plans and ultra short-term debt funds.

"We have seen money coming in from corporates, banks, high net-worth individuals and retail investors into income funds. The debt products are in demand on expectations of reduction in interest rates," said S Naren, chief investment officer at ICICI Pru, which manages assets worth Rs 88,000 crore.

The average yield of shorter duration papers (maturity period of around one year) is hovering around 8.50% compared with 7.50% of longer duration papers (maturity period 10 years and above). Fund managers are expecting the coupon rates of longer duration bonds to remain low as interest rates are expected to fall over the next one year after the Reserve Bank of India cut interest rates by 75 basis points in the past four months this year.

"Investors are reallocating their funds to shorter tenure from longer tenure bonds as they expect the yield curve to steepen in shorter maturity bonds," said Sampat Reddy, chief investment officer at Bajaj Allianz which manages funds worth Rs 45,000 crore.

Money managers say the mood in the bond market is likely to remain buoyant for some time on hopes of another 50-75 basis point cut in interest rates in FY 14.

"We expect a flurry of action on the macro-economic front. If commodity prices remain soft, then one can expect another 50 to 100 basis point rate cut over the next one year," said Saurabh Mukherjea, head of equities, at Ambit Capital.