Investors tap long-term debt funds on rate cut hopes

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Mumbai | Published: April 7, 2015 12:14:11 AM

In anticipation of further rate cuts by RBI, investors have started pouring in money into long term debt funds...

In anticipation of further rate cuts by RBI, investors have started pouring in money into long term debt funds. Since start of the current calendar year, RBI has slashed repo rates twice by 25 basis points (bps) each to7.5%. Market expects another 50 bps cut over the next one year which will  have a positive impact on longer duration debt funds.

According to the data from CRISIL, assets under management (AUM) of gilt funds rose from R6,984 crore in the October-December quarter of 2014 to R11,429 crore in January-March quarter of 2015, a rise of 63.66%. While long term debt funds saw their assets rise by 26.78% to R88,806 crore in January-March quarter of 2015 from R70,047 crore in the quarter of October-December 2014. The CRISIL report also stated that, “Both categories benefitted from increasing inflows amid a reduction in policy rates by RBI and hopes of further cuts.”

The 10-year government securities (g-secs) yields on Monday closed at 7.72%. There are also expectations that over the next few months g-secs might range between 7.25% to 7%, which could also help income and gilt funds. Killol Pandya, senior debt fund manager at LIC Nomura AMC says, “With interest rates on their way down, we have seen increased participation from investors in long term debt funds like gilt and income funds.” Several gilt medium and long term debt funds have given 15-18% returns in the last one year.

Market participants say that going forward the mutual fund industry will continue to get inflows into debt funds, especially long term debt funds, as we see more rate cuts by the central bank.


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