Investors move out of gold mutual funds; record inflows in FMPs

The craze for gold exchange-traded funds (ETFs) is going down fast and furious even as fixed maturity plans (FMPs) are back in favour, according to data released last week by the Association of Mutual Funds in India (Amfi), a trade body. As expected, investors are keeping their distance from equity funds, thanks to the prevailing market uncertainty. Liquid funds, on the other hand, have started getting back inflows that had paused for some time.

add_main_imageInvestors withdrew 594 crore out of gold ETFs in the month of August. This is the highest amount of money ever withdrawn from gold ETFs. At the same time, only about 6 crore flowed into these funds, the lowest level since March 2009.

“Gold prices have risen to quite high levels and it has sustained so far because the Indian rupee has been depreciating,” said Akshay Gupta, chief executive officer, Peerless Funds Management Co. Ltd, which managed 4,538.11 crore worth of average assets as on June 2013. “But if the rupee starts appreciating, which it has done in the last week or so, gold might go down significantly.” It’s natural for investors to book profits at higher levels, especially given the way gold prices have appreciated in the past few years, Gupta added.NextMAds

Amfi data also shows a surge in FMPs. Close to 20,000 crore was invested in these instruments that were freshly issued in August, up from about 9,000 crore in July and about 3,000 crore in June.

Due to a hike in interest rates, especially short-term yields, FMPs have been able to find high-yielding debt scrips in the market to invest in.

Money locked in at such high yields results in FMPs giving high returns. For instance, a three-month commercial paper was available at a rate of 11.0625% on 6 September, up from 8.45% on 31 May.Yields on commercial paper and certificate of deposits across tenors have risen in the past two months on the back of liquidity tightening measures taken by the Reserve Bank of India.

“Whenever interest rates have moved to double-digit levels, investors have rushed to buy FMPs,” said Dhawal Dalal, head of fixed income at DSP BlackRock Investment Managers Ltd, which had 33,041.19 crore of average assets under management as on June 2013-end. Amfi does not disclose fund house AUM figures on a monthly basis; it does so only on a quarterly basis.

But there’s a twist in the FMP tale. A lot of institutional investors who had earlier parked their money in ultra short-term funds have moved to three-month FMPs, according to Gupta. “Not all money, therefore, is fresh money,” he said. “It’s also a switch.”

Volatile equity markets have virtually kept investors away from equity funds. These funds (including balanced funds, because most of these are quasi-equity funds that invest about 65% in equities and the rest in debt) got inflows worth 3,018 crore, their lowest in the past 52 months or since May 2009. But on account of low redemptions as well, equity funds have managed a net inflow (more money came in than went out) to the tune of 441 crore (including balanced funds). sixthMAds

Liquid funds have managed to reverse the outflow that they saw in the past two months. This category of funds has seen a net inflow of about 32,000 crore in the month of August. On account of liquidity tightening measures, liquid funds had seen a net outflow (more money went out than came in) in the months of June and July.