Gilt funds are catching the fancy of MF investors again and why?

By Bhavana Acharya

During financial year 2016-17, gilt funds fell out of favour with investors. The category saw a net outflow of Rs 3,306 core that year, compared with a net inflow of Rs 759 crore in the previous financial year. From December 2016 till April 2017, gilt funds saw inflows shrink steadily and this was accompanied by strong outflows too.

This is not surprising given the strong rally in these funds, especially towards the second half of 2016, and the sharp dip in returns as the Reserve Bank of India changed its monetary policy stance in early 2017.

Going by the numbers for this financial year, gilt funds have seen more investor activity. It started out with a gilt aversion, but slowly gave way to optimism before wariness took hold again.

Driven by corporates and retail investors
In May 2017, gilt fund inflows more than doubled over the preceding month. Since July 2017, gilt funds saw net inflows for the most part, a departure from the net outflows until then. This preference for gilt funds seems to have come from retail investors (defined by AMFI as individual investors investing below Rs 5 lakh) and corporate investors, going by AMFI’s quarterly AUM releases.

For the September quarter, retail gilt AUM grew 5 per cent compared with that in the preceding quarter. New investors appear to have jumped on board, with the rise in retail gilt folio count beating the folio increase of equity-oriented and balanced funds in the September 2017 quarter.

Retail investors appear to have preferred the gilt segment for about three quarters now. Their share in total gilt AUM from the March 2017 quarter onwards is at the highest it has been in at least three years. For corporate investors, the rise in gilt AUM at 19 per cent was much more than other categories in the latest September 2017 quarter.

Further, their share in total gilt AUM at 64.3 per cent is also at the highest proportion in at least three years.



While HNI investors form the next biggest chunk of gilt AUM share at 23.3 per cent, this set of investors has more or less stayed put in the September quarter of 2017 after it fell for the two previous quarters.

Banks and other financial institutions, of course, are negligible players in the gilt fund space. But with the market divided on interest rate direction and several factors playing into rising gilt yields, jitters appear to have surfaced again.

October inflows into gilt funds have dropped sharply. More clarity on rate action could thus turn the tide for gilt funds.