Mutual funds' holding of government securities nearly trebled in 2012: RBI

MUMBAI: Mutual funds’ holding of government bonds nearly trebled last year as investors shifted attention to long-term fixed income schemes from short-term liquid funds to profit from falling interest rates. Assets under management of long-term bond funds have swelled, resulting in a rise in mutual funds’ ownership of G-secs to 1.20% of the total government bonds in float in December 2012 from 0.27% a year earlier, data from the Reserve Bank of India shows.

“In the last year, there has been a shift to long-duration funds from liquid and fixed maturity plans,“ said A Balasubramanian, chief executive at Birla Sun Life Asset Management. “The interest rate outlook made investors move into long-duration funds.”

Interest rates and bond prices move in opposite direction. Total assets under management, or AUM, in money market and liquid funds rose sharply from Rs 1.49 lakh crore in December 2012 toRs 1.59 lakh crore in January. Their share in total AUM went up from 20% in December 2012 to 24% in January, data from the Association of Mutual Funds in India shows.

“With some monetary easing by the RBI, and on hopes of further rate cuts, bond yields eased during the year. The benchmark 10-year bond yield fell by around 50 basis points during the year,” said a report by Morning Star India Research, a company that tracks mutual funds industry. “As a result, gilt funds and longer-duration bond funds outperformed in 2012,” said the Morning Star report. “Long government bond funds were the top performing category from the fixed income segment, delivering a return of almost 11% in 2012.”

For an industry that was hit by lack of investment opportunities, government bonds emerged as an attractive avenue on expectation of a rate cut and the consequent impact on bond yields. From the fund houses’ perspective, there has been a shift in assets from income funds to liquid and money market funds and gilt funds.

The changing interest rate environment also prompted fund managers to increase the maturity profile of most bond fund categories, to capitalise on the fall in bond yields. The average maturity of long-term government bond funds was increased from about six years at the end of 2011 to 14.4 years in November 2012. Average maturity of intermediate bond funds was also doubled to around eight years at the end of November 2012.