WHAT do wealthy investors know about the prospects of India’s government bonds that many others do not? Even as the outlook on these bonds remains hazy, these investors have raised exposure to mutual fund schemes that invest in government paper in the past six months. Wealth managers and advisors said that ‘attractive prices’ of government bonds and heightened uncertainty in equities prompted these investors to increase their bets in these schemes, known as gilt schemes.

“High net worth investors are taking a contrarian bet on gilt schemes for the longterm, as all the negatives are already visible,” said Sunil Jhaveri, chairman, MSJ Capital, a New Delhi-based mutual fund advisor.

“Higher revenue collection by the government this year, non-disruptive government borrowing, likelihood of inflation topping and liquidity due to bond redemptions this fiscal make a case for bottoming out of the benchmark paper,” he said.

The holdings of these affluent investors in gilt schemes were Rs 1,917 crore as on March 31, compared to Rs 575 crore on September 30, according to Association of Mutual Funds of India (Amfi). A larger chunk of the investments by this investor category could have come since January 2010, according to a wealth advisors.

Yield on benchmark 10-year paper has risen about 45 basis points (0.45%) so far in 2010 to 8.03% on Monday on concern higher government borrowings in 2010-11 could increase the supply of such bonds this year. Lack of certainty about the borrowing calendar also lifted yields.
Bond yields and prices move in opposite direction; when yields rise, prices fall and vice versa. Investors profit from this market through appreciation in bond prices, which happens when yields fall.
“Wealthy investors are buying gilt funds when they are available really cheap and nobody wants them. They are betting that the 10-year would not cross 8.5%,” said a head of wealth management with a domestic broking firm. Corporates have marginally raised their exposure to gilt funds to Rs 3,710 crore on March 31, compared to Rs 3,220.37 on September 30.

The interest of wealthy investors in cheaper assets comes when many expect limited upsides in the stock market over the next 12 months, as valuations are considered expensive. Investors fear tightening of interest rates in the US and default scares in some European economies could trigger corrections in emerging markets.

High net worth investors have cut exposure to mutual funds’ equity schemes to Rs 22,589 crore as on March 31, compared to Rs 38,015 crore on September 30. While a significant portion of the well-heeled investors put money directly into the market, the redemption from equity schemes is an indication of their uncertain outlook about stocks. Some wealth managers don’t agree that this would be the right time to buy gilt schemes. “We have not been pushing clients to increase exposure to gilt schemes as of now. We would consider it if the (10-year) benchmark touches 8.5%,” said Ashish Kehair, head-wealth management, ICICI Securities.

Inflation will be the biggest concern for investors in gilt schemes, because if prices fail to subside, the central bank would be forced to absorb liquidity further, an instance where lesser money would flow into government bonds. MSJ Capital’s Jhaveri feels attempt to ‘catch the downside’ for government bonds would not be the right strategy. “One can start systematic investment plans (SIPs) in gilt funds for longterm,” he said.

SOURCE: ECONOMIC TIMES