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Despite the Reserve Bank of India (RBI) reducing policy rates by 25 basis points, gilt funds might not be the best investment option in the near future.
In an ideal market, falling interest rates push gilt prices up, resulting in higher net asset values and better returns for investors. However, due to a bloated government borrowings programme and RBI's hawkish stance, returns for such funds may be capped, say experts. They suggest investors consider funds that invest in a wider basket of securities, such as income funds.
Gilt funds invest in government debt alone.
Kartik Jhaveri, director, Transcend Consulting (India), said, “Some profits have been made in gilt funds and some more can be expected, as further rate cuts come in…We recommend medium-term income funds with a horizon of one to two years.”
Suresh Sadagopan, founder, Ladder7 Financial Advisories, said gilt funds weren’t expected to provide major gains. “A small upside is possible in gilts. But investors could look to actively managed funds for better returns,” he said. Experts say income funds would benefit from their investments in corporate paper with maturity periods higher than two years, since these offer higher rates.
Gains in gilt funds could be limited, owing to factors such as excessive supply of government paper. The government plans to borrow Rs 3.49 lakh crore in April-September. Experts say this would lead to excess supply in the market and limit the fall in yields and the consequent gain for gilt funds.
To add to the uncertainty, the central bank said there was limited headroom for further monetary easing.
As of February-end, gilt funds had assets under management of Rs 8,238 crore, according to a CRISIL report.
Rahul Goswami, chief investment officer (fixed income), ICICI Prudential AMC, recommends investing in short- and medium-tenure funds. “We recommend funds with two to five year maturity…Investors could look at short- and medium-tenure debt funds, including dynamic bond funds and short-term income funds,” he said. He cautioned against possible volatility in gilt funds. If investors wanted to put their money into the segment, they should look at an investment period of 12-18 months, he said.
Sunil Jhaveri, chairman, MSJ Capital & Corporate Services, says gilt funds could be more of a trading call.
“There is lack of clarity on further interest rate cuts and inflation…Gilt funds and other funds with exposure to gilt funds may not be the best bet…Investors would do well to invest in short-term plans with an average maturity of not more than one to one and a half years,” he said.
He added such funds could fetch double-digit gains.
