Gilt funds back on investors' radar; segment sees inflows of Rs 986 crore

Fund managers say investors can still make a double-digit gain from hereon

Gilt mutual fund schemes, which invest in government securities (G-Sec), are back in vogue as institutional and rich individuals are betting that the ongoing rally in these bonds would fetch them double-digit returns. Mutual fund industry officials said gilt schemes are attracting more flows in May after seeing renewed interest in April following a two months of shrinking popularity.

Fund managers said expectation of sharper policy rate cuts in the rate-setting meeting next month in the wake of the lower inflation data has resulted in the fall in government bond yields (or the rally in prices). Yields and prices are inversely related; when yields fall, prices rise and vice-versa. Gilt funds benefit when bond prices rise because they do not hold the securities to maturity and churn returns through trading.    

Yield on 10-year government bond has fallen to 7.39% on Thursday from about 8% on April 1 and 8.20% late last year.  

"During April, when the yield on 10-year was close to 8 per cent, many investors got into gilt schemes,” said Navneet Munot, chief investment officer (CIO) at SBI Asset Management.

In the last six months, gilt fund category has posted an average 9.17%. These schemes, which have returned 14.6% in a year, have been the best performers in the fixed income category. Income funds have posted 13.13% in a year.

"I believe that inflation from hereon will continue to show downward trend and rates could fall by 75 basis points (bps) which will positively impact returns from gilt schemes. Investors can still make double-digit returns in gilts from a one year perspective," said Murthy Nagarajan, head of fixed income at Tata Mutual Fund.

A recent debt market survey by Barclays of foreign institutions showed majority of the respondents planned to increase their exposure to government bonds over the next three months. But, very few expected the 10-year benchmark to cross 7.25%. Most of them saw the yield staying at around 7.5%.

"The movement in bond yield from here on depends on what RBI does,” said Alok Singh, CIO (fixed income) at Bharti Axa Mutual Fund. “Markets seem to be discounting one rate cut (June) and from a year’s perspective, 8-9 per cent return is quite achievable."

The government’s borrowing programme also had a bearing on the government bond prices as the extent of paper supply partly determines the direction of the yields. When the supply is higher, bond yields rise, depressing prices. But, this year, fund managers are more focused on the central bank’s moves as the government’s borrowing is not expected to breach the target this year.

Currently, total assets under management by 43 gilt schemes is at Rs9181 crore, which is about one%age of India's total mutual fund assets.

“Considering the size of papers which government issues, the size of gilt funds is still very small. There is huge potential in this segment," said Munot.

Distributors said gilt schemes have largely been a ‘trading product’ as investors usually put in money or withdraw based on their outlook for 10-year government bond.