Gaining popularity

Calcutta, May 5: Successive rate cuts by the Reserve Bank of India (RBI) have made gilt funds popular among retail investors, with the number of folios rising 90.7 per cent to 51,763 in March from 27,145 in September 2012, according to data available with the Association of Mutual Funds in India (Amfi).

Even high net worth individuals (investing more than Rs 5 lakh) and corporate houses shovelled more money into gilt funds. HNI folios rose to 7,231 in March from 4,167 in September, while corporate folios grew to 3,992 from 2,960.

Gilt funds are mutual fund schemes that invest exclusively in government securities, unlike conventional debt funds where the underlying assets are a large variety of debt instruments.

During the January-March period, the RBI lowered the repo rate twice by 25 basis points each to 7.5 per cent. Bond prices have an inverse relationship with interest rates. Therefore, the rate cut by the apex bank has translated into higher prices on government securities.

Market observers said gilt and debt funds, despite their inherent risk borne out of interest rate fluctuations, were able to yield an average return of 9-13 per cent last year. They maintain that the trend of retail investors moving to such instruments is likely to continue because of attractive short-term returns and volatility in the stock markets.

“Whenever there is a rate cut, it is beneficial for investors of these funds. The RBI has recently (on Friday) announced another rate cut of 25 basis points (to 7.25 per cent). This will improve returns for these funds,” said Deepak Chatterjee, managing director of SBI Funds Management.

In contrast, retail folios in equity funds fell to 32,63,4506 in March from 34,98,5360 in September 2012.

“The market has been volatile in the last six months and inflation adjusted returns for investors have not been good. So, we are seeing a large offload in equity mutual funds. But, with declining rates, gilt funds have become popular,” said Arun Kejriwal, chief of KRIS.

He added that in the near term, he expected the declining trend in equity segment and rising demand for gilt funds to continue.

Amfi data point out that the mutual fund industry has lost 5 per cent of retail folios in the last six months of 2012-13.

Between September and March, retail folios declined to 414.04 lakh from 435.5 lakh, a fall of over 21 lakh.