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Investors should always have gilt funds in their portfolio, says Prashant Pimple of Reliance MF

Gilt funds are suitable for investors with absolutely no appetite for credit risk and with willingness to stay invested for three to five years .

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Last Updated: Mar 19, 2019, 11.27 AM IST|Original: Mar 19, 2019, 11.27 AM IST
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prashant pimple
Gilt funds are suitable for investors with absolutely no appetite for credit risk and with willingness to stay invested for three to five years or more, says Prashant Pimple, fund manager, Reliance Gilt Fund. Edited Interview

Gilt funds are giving an average return of 8.23 per cent in one year. What contributed to it?
Last year gilts as a category has outperformed most of the asset classes as yields on G-secs fell on account of Open Market operations (OMO), under which RBI buys G-secs from market to provide liquidity, rate cut of 25 bps by RBI and lower inflation readings. The 10-year G-sec yield made a high of 8.15% on supply worries in Sep 2018 but as RBI conducted more and more OMOs and followed by rate cut and further expectations of rate cuts markets took comfort with yields trading lower at 7.35-40% currently. We used this as an opportunity to increase duration at an appropriate time so as to benefit from fall in yields over last one year.

There are a lot of uncertainties in the debt market. What are the main factors that will decide yields of government securities next year?
We think demand and supply of G-secs will be a major determinant of yields into FY 20. Though we have positive factors like low inflation, global growth concerns , domestic growth concerns, RBI monetary actions in form of rate cuts and liquidity management, we think demand for G-sec in next year without OMO will be a cause of concern especially at the longer end of the curve. Hence RBI continuing with its OMO purchases is key for yields to continue to fall further.

Government's deficit numbers and borrowing plan is still clouding the debt market. What are your expectations on this front?
Government in its budget announced a fiscal deficit of 3.40% as against expectations of close to 3.10% for FY 20. The higher number is mainly on account of lower expected revenue on expectations of growth slowdown both globally and locally. Similarly, the borrowing numbers are on a higher side as against expectations by roughly Rs 50,000-60,000 crores on a net borrowing basis. Issuing this kind of high absolute number will be possible only if we have an alternate demand in form of OMO purchases by RBI or Foreign investors investing in Indian G-Secs. We expect a combination of both the factors to support yields in FY 20.

Will the general election results have an impact on the debt market?
We do not expect outcome of general elections to have material impact on debt markets. The current announced budget for FY 20 seems to be realistic in terms fiscal deficit management, we do not expect any major deviations in the final FY 20 budget irrespective of the election result.

Do you think debt investors should start investing a part of their corpus in gilt schemes? Or should they wait for some more time?
Gilt funds have delivered consistent returns beating many categories of funds within fixed income arena over medium—to-long-term investment horizon. This was possible mainly because of liquidity of the underlying instruments (G-Secs) which allows the fund manager to manage duration effective in all kind of interest rate scenarios without taking any credit risk in the fund. Hence, we advise investors to use gilt fund investment as an constant portfolio allocation strategy from a medium-to-long-term investment horizon perspective.

What is your advice to the existing gilt fund investors?
We expect RBI to continue with two more rate cuts in the coming year and inflation to stay within RBI threshold level of 4%, both these factors are expected to keep overall yield curve lower. Uncertainty on account of demand for G-Secs would be clear over next couple of months. Hence, we advise existing investors to stay invested and stick to their investment horizon in gilt fund.

Many mutual fund advisors do not recommend gilt schemes to investors because they believe regular investors can't handle the complexity of the product. They say investors can't time their entry or exit by taking a call on yields and the economy. What do you think?
Gilt funds are suitable for investors with absolutely no appetite for credit risk and are willing to stay invested for 3-5 years investment horizon or more. Gilt funds invest only in Government of India securities which are the most liquid instruments in our country and carry sovereign rating which is the highest available credit ratings in our country. Investors need not time their investment in this asset class rather stick to their investment horizon. In fact, gilt funds are very simple product where the fund manager mandate is to generate returns over a medium-term horizon using both core and tactical strategy in an effective manner. As the underlying G-Secs are very liquid the fund manager is able to execute interest rate call in near term as well as long term for generating superior returns over a period of time. The same is evident from the fact that Gilt funds as a category has performed really well over a medium to long term horizon.

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