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Long duration, gilt schemes topping debt mutual fund charts. Should you invest?

Long duration funds and gilt funds have made a comeback in the last six months.

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Last Updated: Apr 17, 2019, 12.44 PM IST
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Long duration funds and gilt funds have made a comeback in the last six months. Long duration category was topping the debt mutual funds space with an average return of 8.44 per cent in the last six months, followed by gilt funds (5.70 per cent). Gilt funds with 10-year constant duration was offering 6.60 per cent in the same period. Mutual fund managers say the turnaround was because of the RBI’s dovish monetary stance and rate cuts which brought the bond yields marginally down.

“After October 2018, the interest rate environment, both globally and locally, has shifted. The world is in the midst of a synchronised slowdown. Most central bankers have turned dovish and RBI has also cut rates by 50 bps so far, which is a significant turn from what was the state of event globally six months back. This is reflected in the fall in bond yields and consequently the performance of long duration bond funds,” says Suyash Choudhary, head- fixed income, IDFC Mutual Fund.

Bonds have seen a significant rally in the September-December period. 10-year G-Sec yields have fallen from the highs of 8.20 per cent in September to 7.30 per cent in December 2018. Currently, the bond yields stand at 7.40 per cent. Mutual fund managers believe it is the September-December rally that has benefited the long duration funds.

Taking a look at the quarterly returns, long duration funds generated 7.72 per cent returns in the quarter ending December 2018 as against 1.74 per cent in the quarter ending March 2019. Gilt funds gave 4.86 per cent in Q3 vis-a-vis 1.72 per cent in the fourth quarter of FY19.

Since the performance of long duration seems improved, the big question is: Is this the right time to invest in long duration funds?

Mutual fund managers still do not expect long duration funds to outperform short duration funds. They say there are expectations of further rate cuts by RBI, but rate cuts do not necessarily bring the yields down. They say it also a function of demand and supply.

“Our view is that the long term rates will be range-bound as we do not expect any significant drop in the long term yields and to that extent the short term bond funds are expected to perform better in the three to six months than the long term bonds,” says Mahendra Jajoo, head - fixed income - ‎Mirae Asset Global Investments.

Jajoo adds, “There is a huge pressure of the large supplies because of the large government borrowing programme and the improving corporate demand. Also, the RBI injecting liquidity in the system through currency swaps is generally considered positive, specifically for the short term bonds.”

RBI has decided to conduct a USD/INR Buy/Sell swap auction of USD 5 billion for tenor of 3 years on April 23, 2019.

Fund managers believe that in the absence of any intention of conducting Open Market Operations (OMOs) by the RBI, the scenario still favours short term bonds than the long term bonds.

Given the current conditions, mutual fund advisors do not recommend long duration funds to their investors.

“Due to the large supply of the bonds in the market, despite RBI cutting rates, it would not impact yields much. We advise investors to stick to short duration funds,” says Joydeep Sen, founder, wiseinvestor.in .

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