Mumbai: The government is witnessing a rare pile-up of demand for its long-term bonds, with mutual funds now adding to the undiminished appetite shown by insurers, pensions funds and foreign investors over the past year.
Mutual funds have broadly stepped up their bets in longer-duration government bonds in 2024 as the likelihood of interest rates being lowered – even if with a slight delay – brings the prospect of reaping capital gains on sovereign debt. An analysis of public factsheets released by five large mutual funds shows a significant increase in modified duration and average maturity of gilt funds, indicating confidence that interest rates, and consequently bond yields are heading lower in coming months.
Bond prices rise when bond yields fall, boosting the net asset values of debt mutual funds. Prices of longer-term bonds register a sharp rise relative to even a minor decline in bond yields, unlike short-term bonds.
“Mutual funds have added duration across the funds in the past few months. Part of it is due to lower yields across the globe, and FPI inflows in Indian bonds. However, the rate cut expectations in India is also a reason for MFs to be comfortable running duration risks,” said Sandeep Yadav, head-fixed income at DSP Mutual Fund.
The five funds in question are Aditya Birla Sun Life Government Securities Fund, SBI Magnum Gilt Fund, HDFC Gilt Fund, UTI Gilt Fund and DSP Gilt Fund. Of these, the SBI Magnum Gilt Fund manages the largest quantum, with its assets under management (AUM) as of September 30 at ₹10,433.28 crore, followed by HDFC Gilt Fund which had an AUM of ₹2,666.58 crore.
The modified duration of these gilt funds has largely increased from a range of 4.7-9.3 years in December 2023 to 7.6-11.2 years in September 2024, while average maturity has risen from a range of 7.10-22.1 years to 13.8-26.7 years .