With signs of easing inflation and expectations of a pause to rate hikes, investors having high risk appetite can consider investing in gilt funds at this stage, say financial advisers.
With the expectations of rate cut by RBI, gilt funds are expected to see healthy inflows in the coming months. After a few months of pause, the market is expecting that either the repo rate will be left unchanged or reduced from the current levels. AMFI data shows that gilt funds have received net inflows of Rs.110 crore in July.
Keeping this in mind, ICICI Prudential Mutual Fund has launched a 10-year open ended income fund called Constant Maturity Gilt Fund. The fund aims to provide reasonable returns by investing in portfolio of government securities. The NFO opened for subscription on August 25 and closes on September 8. Rahul Goswami, CIO – Fixed Income is the fund manager.
In a press release issued by the company, Nimesh Shah, Managing Director & Chief Executive Officer, ICICI Prudential MF said, “In the current scenario, where G-sec yields are at peak and macro environment turning conducive for propelling a fall in interest rates, there is a strong case for investments in duration funds. Indian markets are seeing a positive rally. The liquidity situation has improved in the recent past and with this fund, we aim to take advantage of the positive real interest rates that will lead to increase in savings rate."
Gilt funds have been out of favour in the recent past as RBI continued its fight against inflation by keeping rate cuts on hold. In February, JP Morgan MF too had come out with its open ended gilt fund called JP Morgan India Government Securities Fund. According to Value Research, the fund is now managing close to Rs. 3 lakh.
Barring July, gilt funds saw net outflows since the beginning of FY 2014-15. The category witnessed net outflows of Rs.900 crore in the first quarter (April-June) of FY 2013-14. However, amid expectations of a rate cut, the category has picked up some steam from July.
An ideal time to invest in these funds is when interest rates are expected to fall, because there is an inverse relationship between the price of the G-Sec and interest rates. A fall in the interest rate leads to a rise in the bond prices as well as the NAV of the gilt fund and vice-versa. Also, longer the duration of the securities/portfolio higher will be the capital appreciation and vice-versa.
Vinod Jain of Jain Investments feels that long durational gilt funds are very attractive at the moment. “It’s difficult to say the magnitude of rate cut but there is a great chance of downward trend in interest rates in the near future. Such a move can definitely benefit gilt fund investors.”
Suresh Sadagopan of Ladder7 Financial Advisories said that investors should consider investing in gilt funds at this stage. “Gilt funds are likely to perform better in the declining interest rate scenario. And from this level, interest rates are expected to come down. We strongly recommend our clients to invest some portion of their investible corpus in gilt funds.”
However, some caution to stay away from gilt funds. Vidya Bala, Head - Mutual Fund Research, Fundsindia, is of the view that long durational income funds can be a better option for retail investors. “Though sovereign papers do not expose investors to credit risk, gilt funds carry high degrees of interest rate risk. Hence, at end of the day, investing in gilt funds is about timing the interest rate movement. Also, if you look 10 years performance of gilt funds, hardly any fund has given CAGR in double digits. Hence, for long term wealth creation, retail investors should consider long durational income funds which invest in a mixed portfolio of government as well as corporate papers.”
Hemant Rustagi of Wiseinvest Advisors believes that gilt funds are meant for investors having high risk appetite. “There is a hope of rate cut in the market. However, when it would happen is still uncertain. Hence, risk averse investors should not consider such funds. Gilt funds are very risky for retail investors. However, those who have high risk appetite can certainly invest a small portion in gilt funds.”
Value Research data shows that medium and long term gilt funds have delivered an absolute return of 9% in a year ended July 31.
