If investors in debt funds take a closer look at their portfolios, they are likely to find that fund managers have begun to take a long-term call in the last couple of months.
For instance, ICICI Pru Gilt Inv raised the average maturity of its schemes to 7.71 years from 3.85 years and from 5.88 years to 14.07 years, according to Morningstar Direct.
Others such as Edelweiss, HDFC Gilt LT, Kotak Gilt Investment, Fidelity Flex Gilt, Birla Sun Life Gov Sec LT and Principal Gov Sec Inv have also taken similar measures.
“At present, 10-year government securities (G-Secs) are being issued at an annual interest rate of over eight per cent. Our experience shows that interest rates peak around 8.4-8.5 per cent,” says a fund manager.
Fund managers expect that at these levels, interest rates may stagnate or fall. In such circumstances, they will be able to trade long-term papers at a premium. It is because when interest rates on new G-secs fall, the older ones with higher coupon rates are in demand and command a premium. The premium is your profit.
Remember that G-sec funds are highly volatile, like equities. However, returns are limited over the long term because after a spike in returns, there may be a lull when interest rates fall. Also, fund managers need to be very deft and nimble to take advantage of rate movements. Before you enter or exit gilt funds, here are some cues.
Economic indicators
In the last one year, due to high inflation, the Reserve Bank of India kept increasing policy rates. The almost monthly increase meant that fund managers were unable to take long-term calls. Consequently, returns were one to five per cent. Only a couple of schemes such as Birla Sun Life GSF Long-Term gave better returns at 9.96 per cent.
For an investor, it is important to keep a tab on policy implications. When rates are rising, things can be slow. But once rates peak or are close to the peak, a smart fund manager can make good money for you.
Government borrowing
When the government borrows heavily, it issues a lot of papers (G-Secs). A flood of these papers means returns won’t be impressive. “There was an oversupply until two months ago. It has reduced gradually. Lower the issuance of G-secs, the more is the demand,” says Maneesh Dangi, head-fixed income, Birla Sun Life Mutual Fund.
Fund specific
A single gilt lot can be around Rs5 crore. This means the fund you are investing in should have a corpus of Rs50 crore, other than a healthy track record. “Else it is difficult to take a call on the fund’s performance,” adds Dangi. The average maturity period of the fund should be seven-eight years.
Investing strategy
Split your investment and invest over time, say in two-three tranches. This will help you reduce uncertainties. The investment tenure should be 12-18 months. “Investors looking at lower risk and stable returns can go for medium- and long-term bond funds,” says Chaitanya Pande, head-fixed income, ICICI Prudential AMC. These funds keep a part of their money in more stable corporate papers and a part in G-secs. Whenever interest rates falls, these schemes increase the G-sec allocation.
