The Hindu : Business : Mutual funds favour corporate bonds

Online edition of India's National Newspaper
Tuesday, Dec 21, 2004

Business

Business

Mutual funds favour corporate bonds

By Our Special Correspondent

NEW DELHI, DEC. 20. A joint study conducted by Crisil and the Associated Chambers of Commerce and Industry of India (Assocham) reveals that for the year ended October, the mutual funds' exposure to corporate bonds has increased perceptibly while their investments in government securities have fallen.

Releasing the study, the Assocham President, Mahendra K. Sanghi, said the mutual funds had invested 65 per cent of their debt portfolios in corporate debt as at August 2004, up from 44 per cent a year ago. Even within corporate bonds, mutual funds have penetrated down the credit spectrum with the proportion of investments in bonds rated in the `AA' category and below, almost doubling in this period for long term debt funds, he added.

The primary reasons cited for corporate bonds to have become increasingly attractive are spreads of corporate bonds over government securities, reduced risk perception of corporate bonds, given the issuers' strong fundamentals and longer duration of G-Securities, which expose mutual funds to relatively higher valuation losses in a rising interest rate scenario.

Mr. Sanghi said that the surge in corporate bond investments by debt-oriented mutual funds in the two years up to September 2003 and the downward trend in interest rates had resulted in debt oriented mutual funds concentrating on G-Secs to reap the concomitant valuation benefits.

However, in recent times, given the upward pressure on interest rates, the proportions of investments have changed, with debt funds increasing their exposure to corporate bonds. While exposure to corporate bonds increased, the funds' exposure to G-Secs had fallen from about 41 per cent to 17 per cent in this period.

In reality, however, Crisil Fund Services believes that this does not fully explain the funds' increased exposure to corporate bonds. Even in absolute terms, the volume of corporate bonds held by mutual funds including short-term and long-term papers, has increased by about Rs. 3,300 crores in the one-year period ended August 2004.

The increase in the corporate bonds exposure is significant considering the reduction in the mutual funds' total debt investments by Rs. 358 billion in this period.

Within long-term debt funds, the proportion of investments in corporate bonds doubled from 34 per cent to 69 per cent in this period.

At the same time, the long-term funds' exposure to G-Secs fell from 58 per cent to 19 per cent.

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