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Debt funds flock to state bonds
Financial Express Lucknow|January 15, 2025
SDLs ARE CONSIDERED NEARLY AS SAFE AS G-SECS
- ANUPREKSHA JAIN

DOMESTIC DEBT FUND managers have increased their exposure to state development loans (SDLs), as they fetch them higher yields compared with central government bonds and corporate bonds, said debt fund managers. In fact, some are even swapping central government securities with these bonds. SDLs are bonds issued by state governments to fund their fiscal deficit.

Currently, the spread between 10-year SDLs and the benchmark 10-year central government bond is 38 basis points. Given the high spread, fund houses like Axis Mutual Fund have even launched state-loan-dedicated funds.

According to industry estimates, mutual funds bought around ₹3 lakh crore of SDLs in FY25, approximately 10% higher compared with FY24. However, it is still lower than pre-Covid levels as borrowings from states have gone down, said industry experts.

"Spreads are quite attractive as they (states) usually borrow less than the notified amount, which makes them more attractive. As far as corporate bonds are concerned, they are illiquid as compared to SDLs, which are quasi sovereign in nature, making them (SDLs) more appealing to investors," said Marzban Irani, chief investment officer - debt, LIC Mutual Fund.

This story is from the January 15, 2025 edition of Financial Express Lucknow.

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This story is from the January 15, 2025 edition of Financial Express Lucknow.

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