Outflows likely to continue for gilt funds

Investors switching to better performing equity funds

With the Reserve Bank of India (RBI) maintaining status quo on rates, outflows from gilt funds, investors in which benefit when the Reserve Bank of India (RBI) cuts rates, are likely to continue. Also, better returns from the equity market might lead investors to continue withdrawing from these funds in favour of equity schemes, experts say.

In February, gilt funds recorded outflows of Rs 937 crore, the highest since September 2013, according to figures from the research division of rating agency CRISIL. As of February-end, total assets under gilt funds stood at Rs 6,481 crore.

Dwijendra Srivastava, head of fixed income at Sundaram Mutual Fund, said the core investor category in these funds was now looking at other avenues for better returns. “Primarily, these funds are retail products. Investors are likely to switch to equities, as the markets are doing well. Yields are likely to be volatile on due to fears over inflation and issues related to supply of government securities; outflows are likely to continue,” he said.

EXIT MODE

• Gilt funds rise in value if interest rates are cut
• These funds have returned 3-9% in FY14
• Investors withdrawing capital from gilt funds, switching to equity
• Multi-cap equity schemes have given returns of about 20%
• Pharma funds have gained 33%

Kartik Jhaveri, director at Transcend Consulting (India), said people would consider withdrawing money from gilt funds and invest these in equity schemes. “Everything looks better for equities. So, money flows to those, as investors are

likely to make more money from equities compared to the capital gains they will see in the case of gilt funds due to any interest rate decline,” he said.

Equity funds saw inflows for the four months ended February. Net inflows stood at Rs 582 crore in February, against Rs 427 crore in January.

Through the past year, multi-cap equity schemes have recorded returns of 20.12 per cent, while returns from gilt funds have stood at three-nine per cent, according to data from Value Research. Medium and long-term gilt funds saw returns of 3.2 per cent, while short-term gilt funds returned 8.84 per cent during FY14, according to Value Research.

Pharmaceuticals, the best-performing equity category, gained 33.6 per cent. While technology funds returned 31.07 per cent, mid- and small-cap funds rose 27.04 per cent.

On Tuesday, the BSE Sensex hit a fresh all-time high of 22,485.77.

Akshay Gupta, managing director and chief executive of Peerless Funds Management Company, said investors shouldn’t give up on gilt funds just yet. “RBI is nudging foreign investors to look towards longer-term securities, which will be a positive for these funds in the longer term. One could see decent returns through the next year,” he said.