MFs tank up on state paper on waning central gilt sheen

MUMBAI: Mutual fund houses have been loading up on state development loans (SDLs) in their debt schemes over the past six months, charmed by their higher yields, low credit risk and lack of money-making opportunities in central government securities.

Also called state bonds or state securities, SDL have traditionally been the poor cousins of central government securities. With SDLs, the state governments borrow funds from the public for covering expenditure. These are issued by the Reserve Bank of India (RBI) on behalf of various state governments, and it improves the creditworthiness of these issuances significantly.

An ET analysis of data by mutual fund tracker Morningstar reveals that ICICI Pru MF, Birla Sun Life AMC and HSBC are the major investors in SDLs. Eleven income schemes���with SDL weightage in portfolio ranging between 1.6% and 6%���of Birla Sun Life MF have state bonds of Karnataka, Maharashtra and UP. While seven income funds of ICICI Pru have SDLs (weightage in portfolio ranging between 0.07% and 5%), HSBC Flexi Debt Fund has 0.7% exposure to a state bond issued by Maharashtra. A few debt schemes of Deutsche MF also had exposure to SDLs some months ago.

���Mutual funds are investing in SDLs sighting superior yields, low default risk and good liquidity,��� said Krishnan Sitaraman of Crisil Fund Services.

���With RBI mediating the repayment, default risk is virtually nil in SDLs. As a matter of fact, SDLs are considered at par with government securities and higher than corporate bonds in terms of credit risk. When compared to some corporate bonds, SDLs are easy to sell in secondary market,��� Mr Sitaraman added.

According to experts, yields on state bonds are (normally) higher when compared to central government securities. To moot the point, yields on SDLs were riding 200 bps over central government securities in March; currently, spreads on SDLs are ranging 70 to 80 bps higher than corresponding government securities.