India’s short-term govt bonds still attractive despite rally -fund managers

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by Reuters

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India’s short-term govt bonds still attractive despite rally -fund managers

MUMBAI, April 13 (Reuters) - Indian mutual funds will continue to load up on government debt even after the recent jump in prices, but they will increasingly target shorter-term bonds, which are less likely to be hit by new tax rules, fund managers said on Thursday.

While the government's move to tax investments in debt mutual funds as short-term capital gains from April 1 will likely impact overall inflows, shorter-term schemes are unlikely to see a large hit, fund managers said.

"Predominant buying will likely continue in the up-to-five-year segment," said Vikas Garg, head of fixed income at Invesco Mutual Fund. "The taxation may have put a bit of a spanner but it does not put down the attractiveness of debt markets."

Indeed, mutual funds were the biggest buyers of government bonds in the eight sessions through April 12, lapping up a net of more than 204 billion rupees ($2.49 billion) worth of debt in the period, data from Clearing Corp of India showed.

In that same period, the liquid five-year 7.38% 2027 bond yield has dipped by nearly 20 basis points to 7.03%.

Further, the potential capital gains after the Reserve Bank of India's surprise pause on interest rate hikes will also continue to aid inflows in fixed-income schemes, fund managers said, especially after inflation data on Wednesday boosted bets that the last hike in the current cycle is likely done.

"The rising part of the rate cycle has played out and the rates and yields should fall this financial year. Mutual funds will keep on adding government bonds, but the pace will reduce," said Sandeep Yadav, head of fixed income at DSP Mutual Fund.

Moreover, Yadav said, mutual funds could be tempted to shift from corporate bonds to government debt in the near term, given their spreads remain unattractive.

Invesco's Garg concurred.

"The spreads for corporate bonds are still not very attractive due to lesser issuances. We need a better entry point to accumulate corporate bonds." ($1 = 81.9775 Indian rupees)

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