Bond-ing with India: Debt mutual funds gain after budget

Photo courtesy: Twitter/@PIB_India
Photo courtesy: Twitter/@PIB_India

The Indian government’s latest budget has laid the roadmap for a deeper and wider bond market in India. The initial documentation and process of investment by Non-Resident Indians will also be much easier in the days to come, as highlighted by Finance Minister Nirmala Sitharaman in the Budget document. 

The budget also aims to keep the country’s  fiscal deficit at a lower rate of 3.3% of GDP compared to the current level of 3.4%, even though government expenditure is expected to grow over the present financial year. 

If the fiscal deficit does not grow, interest rates would not be under pressure to go up, and therefore expectations are that bond yields would continue to move lower and bond prices would go higher. Therefore, one can expect attractive opportunities in investments both in sovereign as well as corporate bonds, both through direct market participation as well as through debt mutual funds. 

“There is a sharp slowdown in growth due to issues related to global trade, sharp cut in government expenditure to meet fiscal deficit targets and liquidity issues in the economy post IL&FS default. This opens for another 50 bps of policy rate cut by RBI,” said Aneesh Srivastava, Chief Investment Officer, IDBI Federal Life Insurance.

“There had been a concern of higher government borrowings. However, the fiscal deficit target is further brought down to 3.3% of GDP and the Finance Minister has indicated that the government would undertake part of borrowings from abroad. Hence concerns of over-supply of Government securities also gets addressed. We expect another 25-30 bps rally in 10-year G-Sec,” he added.

Ajay Manglunia, MD & Head of Institutional Fixed Income at JM Financial Products Ltd. said that India at the moment, with a stable government and strong macro-economic indicators, was an attractive fixed income investment destination among emerging markets.

The obvious question now is which kind of fund is appropriate now for NRIs with a medium to long term investment horizon. In two days - pre-Budget and Budget days, the yield on the benchmark 10-year Government Bond (10-year G-Sec) fell about 20 basis points (0.20%). 

This would translate to a gain of around Rs 1.50 for each bond of Rs 100 in just two days. This is a huge gain by any market standard, and beyond imagination for an investor in the developed markets. 

Net Asset Values (NAV) of all debt mutual funds shot up, leaving investors very happy. Going forward, with inflation remaining low and high probability of interest rate cuts, investors should expect decent returns in the short term too.

Source: Reuters
Source: Reuters

 

Author
Indraneel Basu
Indraneel Basu – Contributor

After 26 years in portfolio management & investment banking, Indraneel Basu is a consultant to insurance companies, a guest lecturer at business schools and a moderator for Insurance Institute of India exam papers on investment and accounts. He last worked as Chief Investment Officer at Universal Sompo General Insurance Co. Ltd. (June 2009-July 2016).  In the 90s, he had headed fixed income securities research & dealing at one of the largest finance companies in India, was head of business development at DebtonNetIndia.com (an IL&FS-NSE joint venture) 2000-2001, was VP (Debt Markets) with investment banking firms 2002-2005 and Director- Debt Capital Markets at IDFC 2006-2009.

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