Outflows pick up pace in gilt funds as rate cycle screeches to an end

Net outflows from gilt funds, especially the long and medium term category, are picking up pace. The category which saw marginal outflows until November-16 has seen them accelerate in last three months, with more than Rs 2100 crore flooding out between Dec-16 and Feb-17. Out of the 37 schemes in this category, 35 funds witnessed a drop in assets in February. The shift in RBI monetary policy stance was probably the trigger for this. Investors may be pressing the exit button from long term gilt funds given the low chances of rate cuts going forward.

According to AMFI, gilt funds saw Rs 722 crore outflow in Feb-17, Rs 212 crore in Jan-17, and Rs 1190 crore in Dec-16. In just three months, over Rs 2100 crore was recorded as net outflows. In comparison, between the period of April 2016 to November 2016, gilt funds saw Rs 61 crore in cumulative outflows.

The tough times for long term and medium term gilt funds started when the Reserve Bank of India (RBI) turned unexpectedly hawkish from December. In early February, it also signalled an unexpected early end to the two-year-old rate cut cycle, citing concerns of resurgent inflation. It left key policy rate unchanged. The change in RBI stance from accommodative to neutral suggests there is limited scope for bond prices to go up from here.

While long term and medium gilt funds still boast of a category average return of 12.5% over the last one year, in the last 3 months net asset values have dropped by 0.60% according to Value Research data. If you look back from Nov-16, some long and medium term gilt funds like Franklin India Government Securities Fund - Long Term Plan, HDFC Gilt Fund - Long Term Plan, and ICICI Prudential Long Term Gilt Fund have dropped by as much as 4-5% in terms of net asset value.

Experts are divided on what is the course investors should take now. Some feel there is little reward to stay put. Alok Singh, Head - Investments, BOI AXA Investment Managers says: "Investors have little incentive to stay in long term gilt funds today. Instead of taking exposure to products which invest in long term gilts, investors can take exposure to products that have a shorter horizon like short term income funds."

Marzaban Irani, fund manager - debt, LIC MF said that as per the Feb 2017 RBI Policy, the MPC (Monetary Policy committee) has changed the stance from accommodative to neutral. Some of the reasons mentioned were rising oil prices, imported inflation and the expected impact of HRA hike of Seventh pay commission. This has led to steepening of yield curve. "Also one needs to look at how the monsoon shapes up going ahead and the inflationary impact after GST implementation. So for investors having short-term horizon we are not recommending long term gilt funds."

However, there are some who feel long term gilt funds should not be completely written off.

In the medium to long term, if macro numbers remain strong and RBI's target of 4% inflation is achieved, there is room for rates to decline, they argue. Also, there is lot of safety today in gilt funds from a credit risk perspective.

Lakshmi Iyer, CIO - Debt & Head - Products at Kotak AMC, said: "If you are already an investor then stay put as you have margin of safety with you. Also if you are in LTCG (long term cap gains ) bracket too, you shouldn't exit."

Murthy Nagarajan Tata Mutual Fund, Head - Fixed Income, also advises investors to remain invested. "No, investors shouldn't exit. Over a three years time-frame, gilts have generated higher returns," he points out.