Govt may insist mutual funds invest 10% in G-secs

The government is mulling over the possibility of making it compulsory for all mutual funds to invest 10% of their assets under management in government bonds, several sources in the know told DH.

They said that the move comes in the wake of the Centre facing a dearth of funds. “The government doesn’t have much money in its coffers. So the move is likely to come soon,” said a senior market analyst who is seen as close to the government.

The move is likely to be positively viewed by the market as it gives security to mutual fund investors in the wake of growing risks.

“This will give a bit of sovereign guarantee to the investors, thereby mitigating the risk,” said another source. At the end of June, the total Assets Under Management (AUM) of the MF industry stands at Rs 25,81,397.21 crore.

The move is expected to bring a certain degree of increase in the returns of the mutual fund investors as bond yields have been coming down over the past few days. The yields on the 10-year government securities have come down by 16.6% and are near a three-year low of 6.3%.

Bond yields and bond prices share an inverse relationship with each other -- as bond prices increase, bond yields fall. This indicates that interest rates are expected to fall, coupled with the fact that the government has been fiscally disciplined. The Reserve Bank of India has cut interest rates by 75 basis points since December.

Mutual funds have fetched poor returns this year. To understand the magnitude of the situation, only six of 65 large-cap equity plans in the country have shown positive returns this year.

Among the large-cap funds, the Franklin India Bluechip Fund has shown the lowest return year-to-date, losing 5.41%.

The situation in multi-cap funds is even worse with Reliance Capital Builder Fund showing a negative return of 14.6% year to date.

The situation in mid-cap funds and the small-cap funds isn’t better either – with negative growth of as much as 14%.

The situation in the debt funds – which have been crippled by the ongoing crisis in the Indian debt markets – is worse than the equity funds.

The year-to-date data of various debt funds show that some have lost as much as 18%. The debt market has been crippled by a liquidity crunch and issues of refinancing among mid-sized firms.