India mutual funds to further tilt towards short-end, steer clear of long bonds, managers say

MUMBAI: Indian mutual funds are set to buy more of the shortest maturity instruments as investors increasingly channel savings into sub one-year schemes, spurning longer duration debt including government bonds, fund managers said.

The trend is taking shape as market expectations grow that the central bank is almost done cutting interest rates and as worries over demand-supply mismatch for longer duration papers help shorter maturities gain favour.

“Market participants believe that rate easing cycle is nearing its end, with possibility of one more rate cut in February,” said Avnish Jain, chief investment officer - fixed income, Canara Robeco Asset Management.

“Hence, investors are likely shifting to money market funds where duration impact is likely to be lower, in case yields continue their upward trend.”

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India’s five-year government bond yield is up 18 bps since the start of November, while 10-year benchmark bond yield is up 13 bps in the same period.

Mutual funds have net sold 133 billion rupees ($1.47 billion) worth of debt in November and 55 billion rupees so far in December.

“Flows have started shifting to ultra-short, low duration and money market schemes, as this part of the curve is providing excellent opportunity,” said Kruti Chheta, fund manager and fixed income analyst, Mirae Asset Investment Managers (India).

“We would continue to see this trend for the next three months.”

Ultra-short schemes typically invest in papers maturing in three to six months, while low-duration schemes target six months to one year notes and money market schemes overlap with both categories.

These three fund categories registered aggregate inflows worth 245 billion rupees in November, a second straight month of flows, while overnight and liquid funds had outflows of 517 billion rupees, data from industry body AMFI showed.

Longer duration schemes too saw outflows, as investors moved money to schemes with a near-term horizon.

Fund managers are now eyeing a further pick-up in yields as the last quarter of the fiscal year is set for elevated debt supply.

“The government’s fiscal position is under pressure due to tax cuts. In this environment, there is little incentive to hold on to long-duration bonds. We have significantly reduced the modified duration of our actively managed schemes,” said Pankaj Pathak, fund manager at UTI Asset Management.