Rahul Goswami, CIO - Fixed Income, ICICI Prudential AMC, makes a strong case for investing in long duration funds for an investment horizon of 2-3 years.
The RBI governor has hinted that rate cut may not happen anytime soon. What impact does this have on your view?
We are overweight on duration. We believe that RBI delaying the monetary softening is clearly providing an opportunity to increase allocation towards long duration in the portfolio.
ICICI Prudential Mutual Fund has recently launched an open ended 10-year income fund called Constant Maturity Gilt Fund. What is the rationale behind launching this fund at this juncture? Why should investors consider this fund?
ICICI Prudential Constant Maturity Gilt Fund is a passively managed gilt fund that aims to invest at least 95% of assets in government securities. The average maturity of the scheme will remain constant and close to 10 years. The fund has an enabling provision to invest in government securities with residual maturity ranging between 8 to 12 years. High duration of this fund could be beneficial as interest rates start trending downwards.
This fund is a pure play on interest rate cycle as it will invest in paper of varying maturities. The portfolio will comprise sovereign issuance which ensures high credit quality. Further, the passive management of the fund will reduce transaction costs as well as fund manager bias.
Gilt funds have seen huge outflows in the recent past. Since gilt funds carry high degree of interest rate risk, why would you suggest investors to consider investing in gilt funds at this juncture?
Investors with a 3-year plus investment horizon can consider gilt funds given the outlook for interest rates. The fund is suitable for investors who understand and have an appetite for the associated risks, as market yields could be volatile over the short term due to to global and local events.
The volatility of gilt funds depends on the average maturity of the securities and the interest rate movement. High duration gilt funds are at the higher end of the volatility curve over the short-term but have a potential to deliver significant returns over the long-term.
Do corporate bonds and government securities paper offer good opportunity right now?
We believe that both government bonds and corporate bonds are likely to do well on account of improving fundamentals.
