Debt MFS raise G-sec exposure
Increase exposure by 30% because of risk aversion and drop in bank CD issuances
Spurred by fears of corporate defaults and a drop in issuance of certificate of deposits (CDS) by banks, debt mutual funds have raised their exposure to government securities (G-secs) by 30 per cent over the past year.
The exposure to G-secs has increased by ~94,215 crore, or 31 per cent, in one year to ~3 trillion at the end of August, data provided by markets regulator Securities and Exchange Board of India (Sebi) shows.
Experts say several debt funds still prefer to invest in ‘liquid’ securities as they have seen several defaults and downgrades of debt papers since 2018.
“The start of non-banking financial company (NBFC) crises in 2018 and subsequent defaults have triggered a flight to safety. Even now, fund houses are afraid of investing in debt papers rated below Aa-plus,” said a fund manager on the condition of anonymity.
Out of ~3 trillion in G-secs, papers maturing over one year accounted for ~2.30 trillion, and ~27,997 crore in papers maturing in less than 90 days. Even the allocation towards public sector bonds/debt increased to ~2.40 trillion in August from ~2.20 trillion last year.
Mahendra Jajoo, chief investment officer (fixed income) at Mirae Asset AMC, says increase in allocation towards G-secs is because of some factors like minimum holding of liquid assets by debt funds and lower exposure towards bank CDS.
“Earlier, debt funds used to invest in bank CDS, but now there are not many papers issued by them as they are themselves flush with ample liquidity. Also, since the IL&FS crisis, the credit market has dried up, so funds are investing in government securities,” he said.
The data from Sebi also shows that debt funds increased their allocation to commercial papers (CPS) and corporate debt (CDS) of non-banking finance companies (NBFCS) in August, compared to last year.
As of August, fund managers hold ~75,243 crore in CPS of NBFCS as against ~49,090 crore last year. Towards NBFC CDS, the exposure was ~86,104 crore in August 2020, which rose to ~92,377.85 crore this year.
Fund managers say that even in NBFC papers, they are investing only in ‘Aaa’-rated and ‘AA’ plus papers. As of August, debt funds have deployed ~17.84 trillion in overall debt instruments, compared with ~15.33 trillion last year.
With expectations of an increase in interest rates, fund managers are investing in short to medium-term debt papers.
“In the current juncture, we believe a combination of liquid to money market funds to benefit from the increase in interest rates in the coming months; along with an allocation to short-term debt funds and/or dynamic bond funds with low credit risks should remain as the core fixed income allocation,” said Pankaj Pathak, fund manager - fixed income, at Quantum Mutual Fund.