Having witnessed a series of defaults including IL&FS, DHFL etc – debt mutual funds over the past eighteen months have been steadily increasing their exposures to government/quasi government entities. This trend has accelerated post the Franklin fiasco and Covid pandemic.
In June, for the first time in recent times, overall debt mutual funds exposure to Government securities as percentage of debt AUM entered into double digits. Additionally, exposure to Treasury Bills also crossed two lakh crores for the first time. Cumulative exposure to G-sec, T-Bills and PSUs now stands at ~40% compared to 16.5% in the beginning of the calendar year 2019.
On the other hand, total exposure to NBFCs has reduced to less than 10% from 16.5% in Jan-19. Similarly, exposure to other corporates has come down to ~33% from 45% in Jan-19.
Apart from risk aversion, there are few other variables as well which seem to be driving higher allocation of funds towards these “safer categories” including :
- Growth of “Banking and PSU” category: Monthly AMFI disclosures reveal that the category has witnessed AUM growth of more than 125% over the past twelve months and the AUM for the category is now touching one lakh crore. As per category mandate a large share of this is getting deployed in PSUs.
- Limited deployment opportunities for liquid funds: Banks are flushed with liquidity and many of them are not issuing fresh papers. This has caused the allocation to Certificate of Deposits to come down to below 5% in June 2020 from 10% in January 2019. Limited deployment opportunities is also pushing funds to deploy short term capital in T-Bills (which otherwise might have gone to bank CDs).
However, it would be interesting to observe how long such high allocation to these “safer assets” can continue. Mutual fund vehicles are pass through in nature, i.e. returns to investors are direct function of portfolio asset yields and considering that the yields offered by T-Bills, G Secs and PSU Bonds are at multi decade lows, the return to investors net of management fee has significantly come down. The same is however not the case with competing investment options like small savings schemes. Small savings schemes are already offering an extra 100-200 bps across maturities compared to bond yields (Read more about this here). Its quite possible that investors might start diverting flows to competing products which may force mutual funds to again start increasing their exposure to non-government assets.
Annexure : Table depicting change in allocation since the month of IL&FS default
|Total Assets in Debt(Cr)||14,75,056||14,87,197|