Income funds’ AuM doubles, average maturity at 3 year high

Investor interest in long-term income funds surged during the quarter ended December 2012, with the average assets under management (AuM) for the category doubling as compared to the previous quarter, ratings agency Crisil, said in its Mutual Fund Rankings for quarter ended December 2012.

Further, the average maturity of the category also rose from 5.49 years to 8.40 years – the highest in the past three years. Additionally, the exposure to government securities has increased while the allocation to certificates of deposits (CD) and commercial papers (CP) has reduced.

The quarterly average AuM of income funds covered under the CRISIL Mutual Fund Rankings rose by 111 per cent, quarter-on-quarter, to Rs 33,563 crore. This is the highest AuM gain in the category over the past eight quarters.

The rise in AuM by Rs17,702 crore was mainly due to inflows from high networth individuals (HNIs) and corporates in anticipation of a reduction in interest rates from the Reserve Bank of India (RBI) in its monetary policy on 29 January 2013.

Bond prices (Fund NAVs) and yields move in opposite directions owing to which a fall in interest rates will result in a rise in bond prices and positively impact long-term debt fund NAVs (returns).

Over the quarter, the yield of the 10-year benchmark government bond 8.15 per cent, 2022 eased by 10 basis points to 8.05 per cent. The 10-year bond has subsequently moved down to 7.88 per cent as of 24 January 2013.

Income funds have also increased their maturity as portfolios with higher maturity would earn superior returns in falling interest rate scenario. 

During the quarter, income funds increased their average maturity to 8.40 years, highest in the past three years. Further, the CRISIL Mutual Fund Rank 1 schemes have aggressively managed their duration with their average maturity being 12.32 years during the December 2012 quarter.

Another portfolio trait observed in the category was the increased exposure to government securities while reducing allocation to CDs and CPs. Allocation to government securities increased to 46 per cent in December vis-à-vis 24 per cent in September 2012. The category also delivered 2.39 per cent absolute returns over the quarter.

Across categories ranked, small and mid-cap equity funds were the top performers in the quarter delivering 8.06 per cent absolute returns.

At the fund house level, tge top three were:

• UTI Mutual Fund led the tally of top ranked funds for the quarter ended December 2012 with nine funds under CRISIL Mutual Fund Rank 1
• This was followed by Birla Sun Life Mutual Fund with seven top ranked funds  and
• ICICI Prudential Mutual Fund, also with seven top ranked funds

The latest CRISIL Mutual Fund Ranking covers over 90 per cent of the industry's average assets under management of the open ended schemes as of December 2012.

A unique feature of CRISIL Mutual Fund Ranking is that unlike most other ranking models that are purely based on returns or net asset value (NAV), CRISIL Mutual Fund Ranking uses a combination of NAV and portfolio-based attributes for evaluation.

Table 1 - Crisil Fund Rank 1 Schemes