Gilt funds back on investors' radar on RBI's 'accommodative stance'

Scheme category sees net inflows this April, for the first time since last December

Gilt funds–mutual fund schemes that invest in government securities or g-secs—logged net inflows in April for the first time since December 2020. Market participants say that the ‘accommodative stance’ adopted by the Reserve Bank of India (RBI) was the key trigger at attracting the investors in the category.

The data from Association of Mutual Funds in India (AMFI) shows that gilt funds received net inflows of Rs 1,647 crore in April. In the period between December and March, the gilt category had seen net outflows to the tune of around Rs 4,000 crore.

Mahendra Jajoo, Chief Investment Officer (fixed income) at Mirae MF says, “The monetary policy of the RBI in April had decided to continue with the accommodative stance as long as necessary to sustain growth. The announcement of the g-sec acquisition programme by the RBI also gave positive momentum to gilt funds.”

Currently, 10 years g-sec yields hover around 6 per cent level.

Gilt funds are among the most volatile in the debt category. They have a long maturity period and make them unpredictable to interest rate changes. When interest rates go down, they benefit the most and vice-versa. Fund managers don’t expect any significant rise in the interest rates in the months to come as the government and RBI combat the ongoing crises.

Typically, the prices of fixed-income securities are dictated by prevailing interest rates. Interest rates and prices are inversely proportional. When interest rates decline, the prices of fixed income securities increase. Similarly, when interest rates are hiked, the prices of fixed income securities come down.

“Over the long-term gilt funds have given excellent returns and if one is investing for the long-term, they shouldn’t worry about short term volatility,” added Jajoo. In the last one year, gilt funds have given average returns of 4.33 per cent. However, for a five-year and ten-year period they have given average returns of 8.2 per cent and 8.7 per cent respectively.

But the financial planners suggest that gilt funds are only for those investors who wish to stay invested for more than 10 years. If investors have a lower investment horizon they should instead look at other debt categories like short term and medium-term funds.

Suresh Sadagopan, Founder of Ladder7 Financial Advisories says, “One can look at investing in gilt funds where the strategy is of buying and holding debt papers to maturity and having an accrual strategy.”

He also added that in the current scenario when we don’t know the direction of interest rates investors can also look at categories like dynamic bond funds and corporate bond funds.