 "Gilt funds are only for tactical play, say experts")
In the past one month, the yield on the on the 10-year benchmark government security has fallen from 7.49 per cent to 7.28 per cent. The price has increased from Rs 100.69 to Rs 102.09. This has helped returns of gilt funds, which invest in government securities and a preferred by risk-adverse investors
According to data from Value Research, one-year returns from long- and medium-term gilt are 11.10 per cent and three-year returns are 9.57 per cent. They are the best performing category in debt funds now.
In the global markets, yields on government securities of the US, Japan, and Germany are close to zero or negative. There is a lot of foreign investors’ money flowing into Indian government securities as well, because of the ample money supply.
No wonder, Samir Arora, fund manager, Helios Capital, tweeted: “It is a twisted world. Investors now buy bonds for capital appreciation (since rates themselves are negative) and stocks for yield (dividend).”
So, should Indian investors, too, look for capital appreciation by investing in gilt funds?
Only as a tactical play, if you have a very specific view on interest rates, said R Sivakumar, head, fixed income, Axis Mutual Fund.
When government security yields were at levels 7.7-7.6 per cent, they were attractive, because there was room for them to fall further and for price to gain. But now most of the gains have happened.
From this level, gains will be limited, said Sachin Jain, head, mutual funds research, ICICI Direct.
“The spike in inflation was expected and the RBI was also expected to hold rates in the coming policy. So, yield on the 10-year benchmark falling below seven per cent looks difficult and that is why it is advisable to look at income and dynamic bond funds, where the fund manager can play on the duration,’’ he said.
Gilt funds are open to interest-rate shocks and tend to be more volatile. As debt investment is supposed to give investors the cushioning effect in their portfolio, gilt funds may not serve that purpose.
Also, as the economy does well, interest rates will come down and so will bond yields. There will be lesser opportunity to earn from yields. While there is a tactical opportunity to make capital appreciation for long-term investment, it is event driven. For the time being, investors can also look at funds that invest in short-term money market instruments as these will gain from the RBI’s liquidity easing measures, said Sivakumar. “Shorter term bonds were the most affected by tight liquidity and with liquidity coming into the markets, these are doing well now. Also, if rate cuts happen, short-term bonds will also gain, just like G-secs,’’ he said.
