The average maturity of debt mutual funds has decreased by 1 to 5 years now compared to the maturity profile of these funds two years ago.
This article examines some of the portfolio characteristics of debt fund categories. In April 2020, fund managers increased the allocation to longer-dated paper, expecting further rate cuts. Now, since April, debt funds have lowered the maturity profile to benefit from reinvestment as rates rise. There has been a portfolio shift towards lower risk instruments such as corporate bond G-secs.
Kaustubh Gupta, Co-Head of Fixed Income at Aditya Birla Sun Life AMC, said: “Due to abundant systemic liquidity and anemic credit growth, credit spreads (premium at which corporate bonds are trade versus G-secs) are much tighter today, making the case for a higher allocation to sovereign papers rather than corporate credits.”
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While average fund maturity is maintained at lower levels, our analysis has highlighted a higher portfolio allocation to instruments maturing in 3-5 years.
Amit Tripathi, CIO, Fixed Income Investments, Nippon India Mutual Fund, said: “The slope of the curve between a 2-year bond and a 5-year bond was very steep (indicating a higher bond yield at longer term). The 4-5 year segment offered protection both in terms of relatively higher carry (credit spread) and moderate duration.” As long as investors match their investment horizon with the maturity of the fund’s portfolio, they can reduce the impact of volatility on redemption,” said Joydeep Sen, independent debt market analyst.
