The Hindu Business Line : MFs turn cautious in G-secs on fears yield may harden

Mutual fund companies will closely watch in coming months the impact of the introduction of cash management bills (CMB) on the yield cycle before deciding on further investments in government securities, according to industry experts.

With the recent notification by the Centre on CMBs, the yield on government securities, it is felt, may harden further, thus offsetting, to some extent, the move by the MF companies to reduce duration of investments in government bonds.

“The supply of government securities is already much higher than demand and, with the introduction of the CMBs, more liquidity would be absorbed pushing up the interest rates,” Mr Sujoy Kumar Das, the Head, Fixed Income, Bharti AXA Investment Managers, said, adding, “we expect the yields to get hardened by 50 to 75 basis points by March.”

CMBs would be issued for maturities of less than 91 days, according to the government notification.

Out of the total funds parked by the company in all fixed income instruments, nearly 25-30 per cent was currently in government securities, down from nearly 50 per cent in January, Mr Das said. Nearly 80 per cent of funds parked in government securities were in below one-year bonds, he added.

About 60-70 per cent of the government bonds on offer are now available in the five to seven year bracket.

“Further investments in securities may take place only if the interest cycle turns around,” he said, adding the projected five per cent inflation rate and expenditure schedule of the Centre were also to be closely monitored.

In case the tax collections were not satisfactory, the Centre and the State Governments might need to borrow further in the face of a drought situation, a fund manager in an asset management company said on condition of anonymity. The continuation of strong growth in Index of Industrial Production for the next two-three months and easing of key rates by RBI in the forthcoming credit policy would send out positive signals to fixed income investments, he added.

Mr Jaideep Bhattacharya, Chief Marketing Officer, UTI Mutual Fund, said the investments by MF companies in government bonds were mostly governed by customers’ participation in gilt funds. A bulk of the forthcoming investments could be in debt and hybrid funds, he added.

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