Gilt fund assets up 145% in 5 mths

Mutual funds have gradually raised their exposure to gilts over the past year, anticipating a cut in interest rates.

According to Sebi data, total investments of mutual funds in government securities rose from R5,716 crore (or 1.4% of debt fund?s total AUM) at the end of 2011 to R47,699 crore (or 8.89% of debt fund?s total AUM) at the end of 2012 ? making it more than an eight-fold increase over the time period.

Gilts, or government bond funds, registered good inflows in the past few months. After seeing lackluster inflows in the first half of 2012, inflows into these funds picked up as the gilt funds registered a cumulative net inflow of R4,600 crore from October 2012 to February 2013. The assets of gilt funds grew 145% ? from R3,356 crore at the end of September to R8,238 crore at the end of February, according to a Morningstar report.

Individual gilt funds saw robust growth in assets. Assets of DWS Gilt fund rose over 12,000% from R9.84 crore in September to R1,246 crore at the end of February, according to Morningstar. Assets of ICICI Pru Gilt Trs, Kotak Gilt Investment Regular and ICICI Pru Gilt Inv PF funds rose 682%, 216% and 157%, respectively, in the same period.

?The recent policy stance by the RBI has increased the appetite for gilts, to capitalise on the downtrend in interest rates. Gilts tend to be quite sensitive to interest rate movement and a preferred avenue in such a market environment. Mutual funds have also warmed up to these instruments lately and increased exposure quite significantly, especially in the second half of 2012,? the Morningstar report stated.

The central bank cut the repo rate by 50 basis points in April last year. While it kept the repo rate unchanged for the rest of 2012, it continued to ease the CRR. This year the RBI has cut the repo rate twice.

Over the past year (ended February 2013), the long-term government bond fund category has been the top performing category within the fixed income space?delivering an average return of more than 10%, according to Morningstar India. ?The higher duration of these funds helped them to capitalise on the downtrend in interest rates over the past year,? its report said. ?When interest rates are softening, gilts and gilt funds deliver good returns and tend to outperform other shorter tenure bond funds.?

However, the total investments of all debt mutual funds in government securities fell from Rs 47,699 crore in December to Rs 45,712 crore in January, as per Sebi data. Also, as per Morningstar data, the average exposure of intermediate bond funds to government securities moderated from 49.6% in December to 41.9% in February.

?The potential for further rate cuts appear to be more limited at this juncture, and therefore investors need to moderate their return expectations from these funds accordingly, when compared to the previous year,? the Morningstar report concluded. ?Investors who cannot digest volatility in returns, or who are more passive in nature, can choose other investments avenues like dynamic bond funds, if they want to capitalise on the fall in interest rates.?