Investors in mutual funds appear to be tracking the macro trends on interest rates and overheated markets while making their scheme choices, going by the rise in the assets under management (AUM) of certain categories.
As yields in Government Securities (G-Secs) and corporate bonds have been coming down in the last one year, Gilt and long-duration funds have seen 43.2 per cent and 64.5 per cent YoY rise in AUM as of July 2024, according to data from MF industry body AMFI. The only other category to grow in the last one year is the money market funds segment, at 56.7 per cent.
Franklin Templeton’s industry dashboard indicates that these three categories were among the few to receive net inflows over the past 12 months till July 2024. Besides, investors have taken to asset allocation funds that give them diversification via stocks, bonds and gold.
The multi-asset allocation fund category has seen a whopping 165.2 per cent rise in AUM over the past one year. Offering a proxy play on derivatives, arbitrage funds were also preferred by investors as seen by the 108.7 per cent surge in AUM for the category YoY.
Tracking yields
The Reserve Bank of India has been on a pause mode on interest rates since February 2023. Moreover, with inflation trending down over the past year and the government keeping a leash on the fiscal deficit as well as its market borrowing programme, investors sensed that interest rates were peaking out. Yields started to trend down — the 10-year G-Sec’s yield fell from 7.17 per cent in July 2023 to 6.92 per cent by July 2024.
With Indian bonds finding a place in global indices — JP Morgan’s in June and Bloomberg likely to follow early next year — demand for government securities of various tenors would rise , potentially pushing yields down further. Yields and bond prices move in opposite directions.
When there is a potential for interest rates to fall, long duration securities tend to gain more, which is why funds housing longer tenor bonds — maturing anywhere from 10-35-year timeframes — rallied well in the past one year. Most Gilt and long-duration funds gave 8.5-11.5 per cent returns in the last one year, according to data from ValueResearch.
On the shorter side, money market funds still sport yield-to-maturities of 7.35-7.65 per cent currently, making them reasonably attractive.
Asset allocation and derivatives play
Overvalued markets have pushed some investors to take the asset allocation route to portfolio diversification. The surge in inflows and the rise in AUM for the multi-asset allocation category are supported by the fact that gold, too, had a good run the past 18-24 months. As a sign of wanting to play the derivatives market via the fund route, arbitrage schemes seem preferred for some investors as AUM in the category more than doubled.
Most arbitrage funds have given in excess of 8 per cent returns in the last one year, with a few even delivering 8.5-8.6 per cent. The key advantage that arbitrage funds offer is the equity taxation — given that net equity position is generally kept above 65 per cent in fund portfolios — but for debt-like returns.