INCOME FUNDS
Kindly refer to our letters dated August 28’2003 & September 01’2003 , wherein we had mentioned the following reasons for switching from G Sec MFs to Short Term Mutual Funds:
- Advance tax outflows in the second half of the month.
- Half year end profit booking by corporates & institutions.
- Building up of cash for likely ouflow of RIB money in the month of October’2003
- RBI has converted special securities of Rs.19000 crs into three dated securities; signalling a likely OMO. ( omo OF Rs.5000 crs was announced subsequently).
- All these above has further widened the Corporate Bond yield spreads.
- After the REPO rate cut, maximum compression has happened in the long dated G Secs. Going forward there is a possibility of only 10 to 15 bps compression in the long dated G secs from current levels of 5.27%.
- Corporate bonds are still quoting 60-80 bps higher than the same tenor G secs. Hence, there is a further scope of compression in Corporate Bonds which form major portion in either Income or short term funds.
- Liquidity overhang still continues & we are still bullish on the Income & STP schemes. Liquidity will drag the 10 year down to 5.05% to 5.10% by end October’03.
- On Risk Adjusted Return basis Short Term Plans look very attractive.
Most of our observations above have proven correct & dragged the 10 year yields from 5.22% on August 22’2003 to 5.36% today.
All the negative factors mentioned above are behind us. Liquidity still seems to be plenty in the system inspite of OMO & the auctions announced by RBI. We might see 10 year touching 5.40% in a day or two purely on account of the advance tax outflows over the next few days. However, the said outflow will be back in the system latest by September 20’2003 .
It will be very difficult to time the market at it’s bottom. Hence, we recommend you to switch back from Short Term/Liquid Funds back to Income funds upto 20% on every rise in the yields from now onwards.
Market is now expecting a Bank rate cut in the Credit Policy to be announced in the month of October’2003. That might or might not happen. Also, it is going to be a busy credit offtake season. Also, new RBI Governor has not given any clear indication whether he is going to continue with the soft interest policy. After the petrol & diesel hikes last week, inflation needs to be monitored closely.
Taking into account all the above factors & the fact that corporate bonds are still quoting at 70-80 bps higher than G Sec of the same tenor, we do not recommend to invest in pure G Sec funds. Most of the Income Funds are already at or around 50% in G Sec. Even a 5-10% shift towards Corporate Bonds will have major impact on corporate bond compression thereby giving better risk adjusted returns in Income Funds vis a vis pure G Sec Funds.
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