Gilt funds to lose sheen on poor returns

Gilt mutual funds, which invest in government securities, may lose their place in the investment portfolio of banks and other institutional investors on the back of low returns.

In an hardening interest rate regime, these schemes trailed alternative avenues such as liquid and income schemes and fixed maturity plans (FMPs) in terms of returns.

Besides, analysts feel the recent decision by the Centre allowing the RBI the flexibility to set SLR could also hurt the prospects of gilt funds.

The norms requiring banks to invest 25 per cent of their deposits in government securities could change once the implementation of the decision begins, though the procedure is likely to be a prolonged one.

Gilt funds, usually seen as a low return-earning instrument and mostly used by small-size banks, provident funds, trusts and corporates, for parking their funds, yielded around 5 per cent returns last year, as the schemes saw higher outflows than inflows.

Gilt MFs were net losers throughout 2006, as investors redeemed around Rs 3,421 crore against their total inflows of Rs 1,664 crore. This left the funds with a negative growth of Rs 1,757 crore at the year-end, and their share in the MF industry halved to 1 per cent on December 31, 2005.

"These schemes invest in short-term as well as long-term g-sec. Their returns are seen higher as interest rates dip. Over the past 6 months, following the measures adopted by the RBI, the rates went up. This led to a rise in deposit rates. Following the strong credit growth of the economy, it was obvious that investors would redeem their money from low-return funds," said Devendra Nevgi, head - fixed income, Quantum MF.

Sandeep Bagla, fixed income head, Principal PNB AMC, said redemptions were more as investors found better short-term avenues to park their rather than investing in long-term gilt funds. The redemptions had been across the board and not from a specific class of investors, he added.

"The yearly returns given by gilt funds have been lower compared with liquid schemes or FMPs. But over the past six months, the returns stood around 9 per cent. We expect the inflow into gilt funds to begin once the interest rates stabilise by the middle of the year," Bagla said.

"Few gilt schemes have been launched in the last six months because of the weak response. Most of the current schemes are of 5 to 7-year period. Interest rates being volatile, investors are incurious about putting their money into these funds," said a fund manager.