Top Indian funds dust off playbooks ahead of index inclusion

By Malavika Kaur Makol

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As a pivotal year for India’s bond market gets underway, its top money managers are debating the best way to position for inflows that may hit Rs 3,32,590 crore ($40 billion), according to some estimates.

Aditya Birla Sun Life Asset Management prefers government bonds with maturities of seven to 14 years, while Bandhan Asset favors securities that have no investment curbs for foreigners.

SBI Funds Management Pvt. and ICICI Prudential Asset Management Co. favor short-tenor company bonds that offer higher spreads over the sovereigns.

The cohort are betting on inclusion in global bond indexes to drive returns after the central bank doused speculation of an interest-rate cut. In 2023, Indian sovereign bonds saw their best annual performance in three years.

Here’s how the fund managers are positioning:

Government Bonds

For Aditya Birla Sun Life, government bonds maturing in 7-to-14 years are likely to offer higher returns than longer-duration notes, on index-inclusion inflows and potential tighter liquidity from the central bank.

7-14 year government bonds more attractive.

Beyond the 7-to-14-year point, the curve is more or less flat, “which means that you don’t get compensated enough for increasing your duration significantly,” said Kaustubh Gupta, Co-head of fixed income at Aditya Birla.

The basic view is that rates have peaked, but liquidity will remain tighter to neutral, he said.

India’s benchmark 10-year sovereign yield fell 15 basis points last year, the most in three years. It’s expected to slide about 30 basis points by the end of 2024 from 7.18 per cent on Friday, according to the median estimate in a Bloomberg survey.

Index Bonds

Bandhan Asset said it’s buying Fully Accessible Route, or FAR bonds, securities that have no investment curbs for foreigners and are eligible for entry into JPMorgan Chase & Co.’s benchmark emerging-market index starting in June.

India's index-eligible bonds see pace of inflows quicken.

“We have been significantly overweight government bonds, and within which FAR government bonds, to the extent allowed by the mandate and positioning of our funds,” said Suyash Choudhary, Head of fixed income at Bandhan Asset. Demand for FAR bonds will sustain for a long period, he added.

Corporate Bonds

Top-rated shorter-maturity corporate bonds of up to three years, which offer better spreads are the top pick for ICICI Prudential. The spread on three-year AAA-corporate paper over a similar tenor government bond stood around 70 basis points, compared with last year’s low of 43 points.

Spread on India's AAA-rated corporate bonds seen widening.

“The short-end corporate bond segment looks attractive right now,” given that the absolute carry is very high, said Manish Banthia, Chief Investment Officer for fixed income at ICICI Prudential. “There are tailwinds to credit at this point of time.”