Net inflows of R2,053 cr in 2012 second highest in six years on hopes of interest rate cuts

Net inflows into gilt funds in 2012 were the second highest in the last six years. The year witnessed net inflows of R2,053 crore against outflows of R996 crore in 2011. October and November witnessed high inflows on hopes of interest rate cuts in 2013.

Inflows into gilt funds were muted for much of 2012 except January, October and November. Inflows of R521 crore in January were followed by substantial outflows of R230 crore and R371 crore in April and May, respectively. However, October and November garnered substantial inflows of R1,018 crore and R1,006 crore, respectively. ?There is expectation that we may see a cut in interest rates of anywhere between 25 bps and 100 bps this year, and gilt funds are expected to do well in this scenario,? said Mahendra Jajoo, head, fixed income, Pramerica Mutual Fund.

Gilt funds had witnessed inflows of R3,638 crore in 2008, the highest in the last six years, but saw substantial outflows of R2,315 crore in 2009.

?On an average, the 10-year gilt was ruling at about 8.25% last year and even at as high as 8.75 levels. Investors were convinced that the yield movement will be on the downside or that the bond prices will rise. Today, the yield is trading at a little below 8% and investors are expecting further uptick on the bond prices because the (RBI) governor has given an indication that interest rates will fall. That is the reason why people have put money in the gilt funds,? said Dwijendra Srivastava, head, fixed income, Sundaram MF.

According to market observers, inflows in gilt funds have improved in the recent times as some mutual funds have done away with the exit load they used to charge for investors exiting before 6-12 months.

?The participation of high networth individuals is likely to be better this year as gilt funds are expected to give better returns,? added Jajoo. Gilt medium and long-term funds gave returns of 10.5% in CY12 according to Value Research.

Market participants believe that duration funds will do better than liquid funds in the coming months. ?Duration funds are luring investors as the liquid funds are returning lower accrual yields of around 8.30% to 8.40%, while duration funds are expected to deliver high single- or double-digit returns on account of capital appreciation in the same time,? said Srivastava.