POST demonetisation of high value currency notes, retail investors can look at gilt funds for higher returns. The government’s drive has given a big boost to liquidity in banks and interest rates are likely to come down as retail inflation, too, has dipped to a 24-month low of 3.6% in November 2016.
Long-term debt schemes like gilt funds benefit most in a falling interest rate regime as bond prices are inversely proportional to the interest rates. So, whenever yields fall, bond price rises and the rise in bond prices move up the net asset value (NAV) of debt funds. Any drop in yield will result in capital gains for investors. In fact, data from Association of Mutual Funds in India show net monthly inflows in gilt funds have been rising for the past few months as interest rates have started softening.
