Investors take a shine to gilt funds; inflow in April highest in 12 years

Satya Sontanam BL Research Bureau | Updated on May 18, 2020 Published on May 18, 2020

Last month, the Indian gilt funds segment witnessed the highest inflows since 2008. A risk aversion to credit risk funds, the decent performance of gilt funds in the recent past and the expectation of a further fall in sovereign yields contributed to this spike.

According to Association of Mutual Funds in India (AMFI) data, net inflows into gilt funds — that invest in government securities — was ₹2,608.84 crore in April 2020. This was more than twice the total net inflows into gilt funds in FY20, of about ₹1,051 crore. This made gilt funds’ assets under management increase 28 per cent to ₹13,066 crore from March 2020 levels.

The quantum of inflow in April is comparable to that in October 2008 when, amid the global financial crisis, the monthly tally was ₹3,725 crore.

Resort to safe haven

Experts think last month’s spurt could have been driven by the risk aversion of investors to debt funds, especially after the recent Franklin Templeton debacle. Credit risk funds witnessed heavy redemptions of ₹19,238 crore in April, close to 70 per cent of the value redeemed through FY20. Inflows into other debt fund categories, too, were impacted in April.

The good performance of gilt funds in the recent past may also have helped. The year-to-date and one-year CAGR trailing returns from the top 15 gilt funds (per our MF tracker) were in the range of 6.1 to 7.5 per cent and 12.2 to 18.5 per cent, respectively. A fall in long-term bond yields in 2019 and 2020 helped gilt funds clock good returns.

Prashant Pimple, Senior Fund Manager, Nippon Mutual Fund, says: “For the returns gilt funds have been delivering, the size of the inflows seems small.”

An expectation of further fall in yields also could have led to good inflows into gilt funds. Suyash Choudhary, Head – Fixed Income, IDFC Asset Management, says: “Sovereign yield is attractively valued. The 10-year bond yield is approximately 225 basis points higher than the effective overnight rate. This is the widest term spread in the last 10 years or so.”

“Institutional investors would have taken a call that interest rates would be at lower levels for a long time or would fall and thus could have invested large sums in gilt funds,” says Avnish Jain, Head - Fixed Income, Canara Robeco Mutual Fund.


Note of caution

Are the high inflows sustainable? “Investors were attracted to the kind of returns that these funds have delivered in the last few years,” says Pankaj Pathak, Fund Manager - Fixed Income, Quantum Mutual Fund. “But note that gilt funds are also exposed to other risks. Though it may not have credit risk, there could be high interest rate risks and the returns could be negative, too.”

“Unless one expects a 100 bps drop in the yield, one should not invest in gilt funds now; but, obviously, it will be a difficult call,” says Sachin Jain, Analyst, ICICI Securities.

Published on May 18, 2020

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