Gilt schemes of mutual funds, which invest in government securities, are finding takers among well-heeled investors, who are betting on a rally in these bonds if the Reserve Bank of India (RBI) cuts interest rates. This product has added a little over 10,000 folios in the last one year to October, a 40 per cent increase from a year ago.
"The investor interest is purely because of the expectations building up that interest rates are going to come down in the next 12-24 months," said Amit Tripathi, head-fixed income at Reliance Mutual Fund. "There is an incremental investment over the last few months which are more into duration assets - basically government securities and 'AAA' PSU bonds," he said.
Folios under gilt schemes have risen to 38,419 in October compared with 27,794 a year earlier. Assets under management (AUM) of high net worth and retail investors in this product have risen around 75 per cent in September to Rs 1,186 crore against Rs 681 crore a year ago.
|BETTING BIG |
|Rise in folios of gilt and debt funds |
| ||Nov '11 ||Oct '12 ||Change (%) |
|Gilt funds ||27,794 ||38,419 ||38.20 |
|Debt funds ||47,82,801 ||55,67,773 ||16.40 |
|Equity ||3,85,21,631 ||3,50,69,760 ||-9.00 |
|Uptrend in retail & HNI assets in gilt funds (Rs cr) |
| ||Sep '11 ||Sep '12 ||Change (%) |
|Retail ||142.64 ||218.32 ||53.05 |
|HNIs ||538.5 ||969.84 ||80.10 |
|Total ||681.14 ||1,186.16 ||74.14 |
|Source: Association of Mutual Funds in India (Amfi) |
"Over the last few years, RBI has been maintaining liquidity in the system and has been able to reduce inflation by around 200 basis points. And, this is raising clear hopes for rate cuts and helping gilt and dynamic bond funds garner assets faster over the last few months," said Debasish Mallick, managing director & chief executive officer of IDBI Mutual Fund, which is launching a gilt fund.
RBI is scheduled to announce its mid-quarter review of monetary policy on December 18. Interest rates (or bond yields) and bond prices share an inverse relationship; when interest rates fall, bond prices rise and vice-versa. Bond traders and mutual fund managers aim to capture the rally in bond prices for capital gains.
Ganti Murthy, fixed income head at Peerless Mutual Fund, agrees: "The central bank's rate cuts will infuse a rally in bond prices. Credit quality has improved now and long-term duration funds have given decent returns over the last three quarters."
But, few expect the central bank to cut policy rates in the upcoming meeting as inflation remains a concern. RBI governor D Subbarao had however, last month hinted the central bank would consider monetary policy easing in January if inflation softened on slowing growth.
Investment advisors said the recent flows into gilt schemes are more of trading bets than investments with a long-term view. "Investors get in and get out of the product rapidly to take advantage of expectations from RBI's policy actions," said Sunil Jhaveri, chairman of MSJ Capital, a New Delhi-based mutual fund advisor. "Even this time, it looks like investors are betting on a dip in the 10-year benchmark to below eight per cent. But that may not last because of persistent inflation and fiscal deficit."
Yield on the 10-year benchmark government bond has hovered in the 8-8.5 per cent range during the year.