Shekhar Sathe of K-Gilts (India's only 100 per cent gilt scheme), however, refutes these charges. According to him, the open-end nature of the scheme, wherein investment is possible all round the year, should lure provident funds into the MF-fold.``At present, these funds have to be on the lookout for good investment avenues and, as a result, their money lies idle for quite some time. Investing in MF schemes will improve the efficiency of their fund utilisation,'' Sathe said, adding that he had received active queries from many provident funds about the nuances of investing in K-Gilts.

A Delhi-based NSE broker felt Herculean efforts will be needed to sell the MF gilts schemes to provident funds who are used to RBI's 12 per cent guaranteed return. ``These funds are comfortable with the fact that any shortfall in returns will be borne by the RBI,'' he said, adding, ``With a lower interest rate regime, the returns generated by MF gilt schemes would come down further. Taken together with the dividend tax on debt funds, the mutual fund option appears even less attractive. Also, there is only one dedicated gilt scheme in the market today, K-Gilts from Kotak Mahindra, and that too is a relatively new entrant.''

However, smoe mutual fund managers said themove will benefit provident funds which are currently not covered under the regional provident fund guidelines. They said there is a clear demarcation between PFs of small and large corporate houses and it is largely the former who invest in the RBI account to earn an assured return. ``If you manage a small provident or gratuity fund, you always face a problem in finding the right price when you go to buy or sell a security. Therefore, it makes sense for these funds to park their money with RBI. It is the second section of large corporates, which form their own PF trusts and manage money to generate a better income than RBI, which could invest in a gilt fund,'' said an analyst.

Concurs a fund manager at a Mumbai-based mutual fund, ``The big corporate houses like Reliance and PSUs like Sail have a huge corpus under their PF funds, form what is called exempt trusts. These funds could come to the gilt funds primarily for three reasons. One, they will not have to worry about the market lot. While the minimummarket lot for buying gilts is Rs 5 crore, you can get into a gilts fund by investing a much lower amount (as in the case of K-Gilt where the minimum investment is only Rs 10,000).

Second, PF funds will not have to wait to achieve a critical mass before they start investing directly; they can invest through gilt schemes which are open throughout the year. And last, the moolah under PFs will be managed in a more professional manner as most PF fund managers are usually passive as they are not allowed to trade. Investments in gilt schemes will help them realise a better yield.''