FUNDVIEW-India's Axis MF raising long-term government bond exposure ahead of index inclusion

By Bhakti Tambe and Dharamraj Dhutia

MUMBAI, May 24 (Reuters) - India's Axis Mutual Fund is increasing its exposure to longer-duration government bonds ahead of the inclusion of Indian debt in global indexes and as macroeconomic fundamentals and demand-supply dynamics are favourable, a fund manager said.

"We have strategically increased our allocation towards both long-term government bonds and three-five-year corporate bonds," said Devang Shah, head of fixed income at Axis Mutual Fund.

"In anticipation of JPMorgan flows, we have tilted our portfolio towards higher allocation on government bonds."

The fund house has increased the duration of their debt funds in line with the schemes' mandate, said Shah, who managed more than 1 trillion rupees ($12.01 billion) of debt assets.

He expected around $20-25 billion of inflows in government bonds once the notes are included in JPMorgan's emerging market debt index from June onwards.

Inflows along with gradual monetary policy easing should aid the 10-year bond yield dropping towards the 6.60%-6.75% range over the next six to 12 months, from the current 7%, he added.

Shah said longer-duration bond yields will likely gradually trend lower and recommended clients to consider gilt/long-duration funds along with short- and medium-term funds, depending on their risk appetite.

"Since we anticipate rate cuts and believe the duration cycle will outperform credit quality in the near term, we continue to remain biased towards long bond holdings in our portfolio."

He said the central bank may cut rates by 50 basis points (bps) over the next 12-18 months.

"With interest rates likely to trend downwards, it is a good time for investors to add debt instruments to their investment portfolio and increase the duration of the debt portfolio," he said.

India's planned supply for the current financial year has been below estimates, and fresh foreign demand will be favourable for the performance of government bonds, he added.

($1 = 83.2300 Indian rupees)

(Reporting by Bhakti Tambe and Dharamraj Dhutia; Editing by Sohini Goswami)

((Dharamraj.Dhutia@thomsonreuters.com;))