The capital markets regulator's guidelines require mutual funds to limit their exposure to any particular sector at 25% of the net asset value of the scheme, with an additional limit of 15% in the financial services sector only for investment in bonds of HFCs.
After the Securities and Exchange Board of India (Sebi) late last month announced its decision to give more room to debt-oriented mutual funds to invest in bonds of housing finance companies (HFCs), debt funds have been buying bonds issued by HFCs, and the additional limit introduced is now very close to being fully utilised.
The capital markets regulator’s guidelines require mutual funds to limit their exposure to any particular sector at 25% of the net asset value of the scheme, with an additional limit of 15% in the financial services sector only for investment in bonds of HFCs.
In addition to the 25% sectoral limit for the financial services sector, which is generally utilised to buy bonds of non-banking financial companies (NBFCs), this additional limit has now taken the total effective limit for mutual fund investment in the financial services sector to 40% of the NAV of a scheme.“Typically, bonds of HFCs and NBFCs offer a higher carry, around 40-50 basis points over the other manufacturing names that we see. So, this is definitely a huge positive for mutual funds because they are generally very positive on the sector,” said Suyash Choudhary, head of fixed income at IDFC Mutual Fund.
The previous additional limit of 10% was completely utilised before the announcement of an increase in the limit was made and that it was likely to continue being so, given the higher yield on these instruments, Choudhary said.
Bonds issued by top-rated housing finance companies such as Housing Development Finance Corporation (HDFC), LIC Housing Finance and Indiabulls Housing Finance generally see high demand, in both the primary as well as the secondary market. With the additional investment coming in, these companies would be able to borrow from the market at a lower cost and pass on the cost benefit to their own borrowers.
Also, in the time that has passed since Sebi issued the circular, yields on debt instruments from HFCs have fallen by around 20 bps in the case of certain shorter-term instruments and around
5-10 bps in the case of longer-term ones.
“The buying has been more towards the shorter end of the curve. But even longer-term instruments have seen reduction of around 10 bps in yields. And this was bound
to happen because these instruments are far more lucrative than those issued by banks or manufacturing companies,” said Dwijendra Srivastava, chief investment officer – debt, Sundaram Mutual Fund.
He added that liquid funds, which have a total asset base of close to Rs 4 lakh crore, have almost exhausted the additional limit since its introduction, and that even income funds, with a total asset base of close to twice that amount, have been heavily buying these instruments.
“The HFC sector has always been a lucrative one for mutual funds. The yields are higher and ideally any debt fund would want to invest as much as they can in instruments of NBFCs and HFCs. I imagine the additional limit has been immediately utilised or will be soon because this is something that all mutual funds were looking forward to,” said Lakshmi Iyer, chief investment officer – debt, Kotak Mahindra Asset Management Company.