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Gilt mutual funds are offering 7.66% in a year. Is it time to invest?

In fact, some gilt schemes are offering more than 10 per cent in the last year.

, ET Online|
Updated: Feb 07, 2019, 09.47 AM IST
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Gilt mutual fund category has offered 7.66 per cent returns in the last one year. In fact, some gilt schemes are offering more than 10 per cent in the last year. It is only below technology mutual fund category in the performance chart in the last year. The category is attracting a lot of attention from investors suddenly as talk about a possible rate cut by the Reserve Bank of India gathers momentum. A low interest rate regime is considered ideal time to invest in gilt schemes, as these schemes benefit the most if there is a rate cut. Is it time for you to invest in gilt mutual fund schemes?

"There is a possibility of a rate cut but we can't be sure whether it will happen in February or April. A change is stance is most likely in the February MPC meet. I think the market has started expecting and accommodating these changes already. We might see a market rally if the rate cut happens but it will not be a big rally," says Lakshmi Iyer, CIO-debt and Head- product at Kotak Mutual Fund.

Gilt mutual funds invest in a mix of government securities of varying maturities. A fall in interest rate benefits long duration debt-oriented funds like gilt funds the most. After 2015, these schemes saw a lot of investor interest and great performance on the back of RBI cutting rates. Last February, the central bank changed its stance from accommodative to neutral which hit the gilt funds hard.

The RBI’s change in stance led to massive outflows from the gilt fund category. However, after a series of monthly outflows, the good performance by the gilt funds has led to inflows for the first time in the current financial year. The gilt fund category saw an inflow of Rs 6 crore in December 2018. Earlier, the gilt mutual fund category saw outflows from January to November, 2018. Debt mutual fund managers believe that RBI’s support and oil prices have played a big role.

“RBI’s constant push in the form of OMOs (open market operations) to stabilise the G-sec yields has been beneficial for the long duration bond funds, including gilt funds. The macro environment, oil prices and international factors stabilised in the last quarter of 2018. All of this went well for gilt funds, but we are not sure about the long-term. What will happen to the gilt funds when OMOs stops,” asks Lakshmi Iyer.

“Gilt funds have been doing well in the last couple of months and there is a possibility of them rallying even more after a possible rate cut. But we are not sure if this performance is sustainable. There is a lot of uncertainty in the market and that is not a good sign for the long duration debt schemes,” says Mahendra Jajoo, head- fixed income, Mirae Asset.

Debt mutual fund managers ask investors to stay invested in short duration debt funds to stay safe in the times of uncertainty. “I believe investors should choose credit-risk funds, corporate bond funds with high quality portfolios. Long duration funds aren’t sustainable at this point. Investors should stay in the three-year kind of duration,” says Mahendra Jajoo. Lakshmi Iyer also believes investors should play it safe at this point: “Staying at the shorter end of the curve is the best option for investors. Short duration and ultra short duration funds are my picks,” says Lakshmi Iyer.

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