Gilt funds see outflows of Rs 498 crore in May

MUMBAI: Gilt funds, mutual fund schemes dedicated to invest in government bonds, have seen outflows of Rs 498 crore in the month of May, reveals the monthly data release by Association of Mutual Funds in India. Gilt funds have been on the investors’ radar for some time now. In FY2012-2013, gilt funds saw net inflows of Rs 3975 crore.

The gilt funds made it to investors’ buy list as the interest rates started moving lower in last financial year. The largest inflow was seen in January when gilt funds received net investments worth Rs 1145 crore.

Investors opted to invest in gilt funds to benefit from falling interest rates, as the gilt funds offer them an opportunity to earn capital gains on long term bonds.

For the beginners, when the interest rates fall, the bond prices go up which rewards investors with capital gains in addition to the coupon payable on the bond.

Though gilt funds delivered for investors, things are changing now. In the last six months, bond markets have seen a rally, where 10 year bond yield has moved down from 8.18% on December 12 to 7.08% on May 24.

This move has generated average returns of 8.93% for gilt funds over the same time frame. “After a swift rally in bond markets, investors have been booking profits given the low probability of a cut in interest rates in the forthcoming policy review due to falling rupee and resultant high current account deficit,” explains Rupesh Bhansali, head-mutual funds, GEPL Capital.

Recent hardening of long term bond yields has been an indicator of the market expectations of lower than expected fall in interest rates at long end of the yield curve. Bhansali recommends investing in short term income funds with three months to one year timeframe.