Amid rate cuts, a gilt-edged opportunity

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Published: April 17, 2015 12:10:51 AM

Inflows of over Rs 7,400 cr in four months highlight investor interest.

Anticipating further interest rate cuts, investors have started pouring money into gilt funds. During the last four months, these funds have seen over Rs 7,400-crore inflows, Amfi data show.

In the current calendar year, the RBI has twice cut repo rate by 25 bps to 7.5%. Market participants largely expect another 50-bps cut over the next one year, which could have a positive impact on longer-duration debt products, including gilt funds.

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Yields on 10-year G-Secs on Thursday closed at 7.8% and are expected to hover around the 7.25%-7% range in the next few months, thus providing a further boost to income and gilt funds.

Dwijendra Srivastava, CIO (debt), Sundaram Asset Management Company, said: “Investors have put in money and want to build-up their positions before further rate cuts happen. We have already seen two rate cuts and expect another 50-bps reduction in a year’s time. Investors are now attracted towards longer-duration funds.” In FY15, gilt funds saw inflows of R7,712 crore, with most flows coming in the last three months after RBI started cutting rates.

To gain from falling rates, fund managers, too, have started increasing the average maturity of income funds. Currently, funds such as Franklin Indian Government Securities Fund, UTI Gilt Advantage Long Term Plan, SBI Magnum Gilt Fund and HDFC Gilt Fund have average maturities in the range of 18-21 years. This has helped them deliver strong returns in the range of 18-20% during the last one year.

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