The Hindu Business Line : Gilt funds see redemption on rate increase fear

Mumbai June 11 Expectations of further hardening of interest rates have put redemption pressures on gilt funds (mutual funds schemes investing in government securities) as the returns on investment in these funds have gone down. Gilt funds have been facing net outflows for the past two months consecutively.

In May, the net outflow in gilt funds in the industry was Rs 181 crore while in April, it stood at Rs 114 crore. The overall outflow for the year has been Rs 295 crore as per the data available with The Association of Mutual Funds in India.

"Investors do not want to take mark-to-market risks as they expect interest rates to harden. The 10-year G-sec yields have already started hardening," said Mr Amandeep Chopra, President, UTI Asset Management Company.

Investors in these funds are mostly provident funds and some high networth individuals. Provident funds have a mandate to invest in the government papers and the funds are dedicated gilt schemes. No fresh money has entered this category. Hence, the fund managers are sitting on cash awaiting to invest when the interest rates dip. "Currently, we have 60 per cent of cash in our portfolio," said a fund manager with a leading asset management company.

"Money entered the gilt funds when the interest rates were down. It was possible to make capital gains easily then. However, with the rising of interest rates, the returns on these bonds have decreased which has led to the redemption in gilt funds," said Mr Ritesh Jain, Fund Manager, debt, Kotak Mahindra Mutual Fund.