Gold funds see inflows in September but equities continue to be redeemed

Gold funds are back in the reckoning suggests the monthly fund flow data from AMFI. But equity funds did not see a similar turn-around in their fortunes despite the recent equity rally.

Highest gold inflows in six months

Net inflow of Rs 332 crore into gold ETFs and gold funds in September, is the highest flow from the beginning of the current fiscal, that is April 2012. This takes the negative inflow position in gold funds until August, into positive territory. With a rally in gold, gold funds have gained anywhere between 7-11 per cent from April till date.

While the Sensex rallied about 8 per cent in the just ended half year, equity funds did much better, with funds in the top quartile outperforming the bellwether index and managing up to a maximum of 20 per cent in the six-month period. And yet, equity funds witnessed net outflows of Rs 3,306 crore, the highest since April this year.

Why the exit?

It is unlikely that investors are booking profits at this juncture, with valuations not scaling too high and returns too not being extraordinary.

The possibility of money having shifted to debt funds was true until August but not in September. Both income funds and liquid funds witnessed outflows in September. While the advance tax season could have triggered outflows, one wonders what prompted retail investors to exit.

One explanation could be shifting to gold or other fixed income products like fixed deposits, what with interest rates appearing to peak. If the latter is the reason, retail investors need to take note of couple of points: one, deposit rates have started receding. Two, if you lock into deposits now (especially by withdrawing from equities), an opportunity to move in to equities may be lost given that you will have to break the deposit to exit it. Three, while you should have a part of your portfolio in safe fixed income products, debt funds may offer a better opportunity to play the interest rate scenario now. Capital appreciation in case of a sliding rate is possible in debt funds but not in fixed deposits.