Fixed Income Funds Expect Cues From Bond Inflows, Policy Rates

Investors have flocked to equity mutual funds with Indian markets breaching new highs every other week, but they may have missed out on opportunities in the bond market. Having said that, fixed income fund managers believe that potential for capital gains still persist.

The inclusion of Indian government bonds in the JPMorgan index on Friday was a watershed moment for the country. But inflows into the bond market in anticipation of the event have already had a bearing on yields. Strong buying by foreign institutions pulled the yield on the 10-year benchmark government bond lower by around 40 basis points since October last year, with the yield on the paper now at around 7%.

Investors in long-duration bonds make capital gains when yields fall. That’s because yield and price of bond are inversely proportional.

Some part of the impact of the inclusion is yet to pay out, according to Sandeep Yadav, head of fixed income at DSP Mutual Fund. Only about 30-35% of the inflows from the inclusion in JPMorgan’s index have come so far, he said.

The proportion of inflow is greater than the outflow even in the case there is a dip in global investments. This is stickier money and it’s here to stay for a while, he said.