Mutual fund (MF) executives in the country might be losing sleep over the ‘so far’ unstoppable outflows from the equity segment, but they have a saviour in gilt funds -- thanks to the expectations building up for interest rate cuts sometime in the beginning of next year.
Gilt funds, which primarily invest in government securities, have brought relief to the sector, with a sudden rise in sales and net inflows over the last two months. In just two months (October-November), the MF sector has witnessed inflow of about Rs 2,000 crore.
This has turned out to be the largest inflow in to gilt funds over the last four years. It was in October, 2008 that the sector last garnered a whopping Rs 3,725 crore as net inflows in this category. According to the Association of Mutual Funds in India (Amfi), the previous two months gathered Rs 1,000 crore each, as sales jumped, surpassing redemptions by a wide margin.
The sector's fixed income heads say it is mainly on the back of rate cut hopes that investors are flocking to gilt funds. Gilt would continue to be among the favourite investment avenues of investors, they add.
MFs find many takers among retail and high net worth individuals, especially for gilt funds, of late. In terms of assets, the proportion of assets in gilt funds from these two investor classes has risen 75 per cent over the last year.
According to Amit Tripathi, head of fixed income at Reliance MF, there is an expectation that interest rates will come down over the next 12-24 months. Investments over the last few months have increased incrementally, - largely into duration assets. There has been incremental investment over the last few months, which are more into duration assets, he adds.
Sujoy Das, head of fixed income at Religare MF, agrees. “Investors should add duration to their portfolios. I believe, government bonds will be one of the biggest beneficiaries of interest rate cuts,” he says. He admits Religare’s gilt fund has witnessed a sudden rise in inflows.
Such a large net inflows in to gilt assets, not seen in recent years, has pushed the assets under management in the category to Rs 5,426 crore as on November 30 from Rs 3,659 crore on March 31, a rise of 48 per cent.
The government has a large borrowing programme but expects to cap the fiscal deficit at 5.3 per cent. However, with the central bank's open market operations for infusing liquidity, bond yields remained more or less range-bound. Fund managers believe interest rates are peaking and once these start climbing down, gilt funds will benefit.
Debasish Mallick, managing director & chief executive officer of IDBI MF, had said earlier that over the last few years, the Reserve Bank of India had been maintaining liquidity in the system and was able to reduce inflation by around 200 basis points. This raised hopes for rate cuts and helped gilt and dynamic bond funds garner assets faster over in recent months.
Currently, the sector offers 39 gilt funds to investors. With the massive inflows in recent months, the overall net inflow into the category in the current year stands at Rs 1,567 crore, up from a negative Rs 926 crore in the same period last year.
