Mutual funds have generally stepped up their bets on longer duration government bonds in 2024, as the likelihood of interest rate cuts – albeit with a slight delay – brings with it the prospect of reaping capital gains in sovereign debt. An analysis of public fact sheets published by five large mutual funds shows a significant increase in the modified duration and average maturity of golden backgroundsindicating confidence that interest rates, and consequently bond yields are going down in the coming months.
Bond prices rise when bond yields fall, which increases the net asset value of debt mutual funds. Longer-term bond prices see a sharp rise relative to even a smaller drop in bond yields, unlike short-term bonds.
“Mutual funds have added duration to all funds in the last few months. Part of this is due to lower yields across the world and FPI inflows into Indian bonds. However, rate cut expectations in India also are a reason for MFs to be comfortable duration risks,” said Sandeep Yadav, head of 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 amount, with its assets under management (AUM) as on September 30 at ₹10,433.28 crore, followed by HDFC Gilt Fund, which had an AUM of ₹2,666.58 crore. of rupees.
The modified duration of these gold 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 the average maturity has increased from a range from 7.10-22.1 years to 13.8-26.7 years.
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