Inflows into MFs slow, but gold ETFs in good demand

Gold price may be hovering near its peak in, but Lakshmi Iyer, head of fixed income products at Kotak AMC, still expects a lot of activity in gold-linked investment products around the gold-buying festivals. In an interview with Bijoy Sankar Saikia, Iyer shares her outlook for the yellow metal and other fixed income instruments. Excerpts:

n The Coal India IPO was a huge success with a lot of retail, institutional participation. Did you face redemption pressure because of the IPO?
There has been redemption pressure on two accounts. One, because of the elevated levels of the equity market right now, obviously you are seeing a lot of profit booking, or I would say parity NAV exits. The other is that the money, which was getting parked in some asset classes, including in fixed income avenues such as ultra short-term funds or liquid funds, and meant for the IPO, is going out.
Obviously, there was some amount of liquidity stress because of the IPO. Apart from this, as a result of the stress of liquidity and rates going up, we are also going to see some bank withdrawals.

n What about inflows?
Inflows are happening. But the net inflow number for the industry on the debt or fixed income side will be flat to negative. The only place where the fixed income market is adding net inflows positively of late is predominantly in FMPs and gilt and bond funds.

n Is the entry load ban still haunting the industry?
First, after the entry load ban the industry was witnessing teething trouble for a couple of months because it was in the transition period. Subsequent to that, if you see the gross sales number, it has been anywhere between Rs 4,000 crore to Rs 5,000 crore every month.
I don’t think the entry load ban has impacted gross sales to a very large extent. What has happened is that because of the huge run up in the market, retail participation to some extent has been left out and those who participated have been redeeming. So the net sales number has been negative consistently for the past four to five months.

n Some of the retail money that has not come into equity funds should have gone on the debt side, ain’t it?
The money that is meant for equity funds will not necessarily come into debt. This is risk-taking kind of money. It will probably go into direct equity if it’s not coming to equity funds. Money is also going into gold and real estate. If you see the past six to eight months, gold ETFs have consistently seen positive net sales. The trend continues. Even in this month, I think these funds are going to see positive sales growth.

n Even when gold is at its peak?
Yes. But it has corrected a little bit now. It has corrected by $40 to $45 to about $1,340 level from the peak. This month, the pace of inflows has reduced a bit in gold funds too. We are seeing some profit taking. But then that happens in any asset class.
n The actual gold-buying festival season is about to kick off. What’s your outlook on the yellow metal?
I think we will see a lot of action around that. You will see gold ETF volumes peak during the Diwali season.

n What will be your target on gold going forward?
If you are asking me if $1,500 on gold is possible in a year’s time, the answer would be a clear yes. A 10 per cent appreciation is quite possible in a year. We are at $1,330-$1,340 right now. In India, gold is a very highly elastic product as far as demand is concerned. When you see high prices, demand reduces and vice-versa. Given the huge spurt in gold prices since July onwards, the response has been pretty encouraging in terms of volumes.
As a retail investor you buy gold during Akshaya Tritiya and Dhanteras. But this time your mentality would be that let me buy 40 per cent to 50 per cent right now and wait for the balance when the price corrects.

n One study showed returns on gold ETFs have not been in line with the price rise in physical gold. Why?
Physical gold as in bar form? If you are simply looking at gold price movement, I don’t think that is a fair comparison. Also, when you buy physical gold, you have a number of limitations. In case of gold ETF, you can even buy 0.5 gm of gold, which is not possible in case of physical gold. Then there are purity issues and you obviously have storage and security issues. I don’t think physical gold can be a better investment idea vis-à-vis gold ETFs.

n The sense on the Street is that the RBI is set to go for another round of rate hike this week. Given that, what would be your outlook on debt funds?
Incremental rate hikes from here on would be largely data determined. There may be a case for hiking benchmark rates by 25 to 50 basis points from now till the end of the financial year. Given this outlook, we would recommend investors to stagger investments into duration strategies, like gilt and bond. Risk-averse investors may also look at investments into fixed maturity plans (FMPs).