Should you invest in gilt funds now?

Government securities seem in a sweet spot right now. With inflationary pressures easing and rate cuts by the Reserve Bank of India (RBI) looking more certain by the end of this financial year or early next year, yields on these will fall. Is this a good time for retail investors to invest in Gilt funds?

According to data from Value Research, over a one-year period, returns from Gilt Medium and Long Term funds are 12.39 per cent. In the case of Gilt short-term fund, the returns are 8.23 per cent.

Retail investors are usually advised to invest in income funds, which invest in a mix of G-secs and corporate bonds, as these are less volatile than gilt funds. However, now is a good time for retail investors to look at gilt funds, says Namdev Chougule, head (fixed income) at JP Morgan Asset Management.

“G-Secs are looking attractive from the point-of-view of inflation, valuation and foreign institutional investors (FII)’s interest. We have been recommending our government securities fund aggressively,” he says.

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Inflation, which is RBI’s main concern, is weak. So, chances of rate cuts are strong, which is positive for G-secs, given that other fundamental factors such as current account deficit, FII inflows, forex reserves are strong. In terms of valuation, G-Secs are attractive over the repo rates, as the annualised yield on the 10-year G-Sec is over eight per cent. With the government and FIIs looking to reset the FII limit in G-secs, the demand for G-Secs from FIIs will continue to be strong. These are why G-Secs look attractive right now, Chougule explains.

R Sivakumar, head (fixed income) at Axis Mutual Fund,  agrees G-Secs are looking attractive now. The fund house is overweight in G-secs in its income fund, too, he adds. But for retail investors looking at a investment horizon of three years, income funds are a better option, since these are less volatile.

“From the portfolio manager's point-of-view, G-Secs will give much better liquidity and lower impact cost. But Gilt funds make sense only if you want to take a tactical view on interest rates and are looking for a short-term duration of up to one year. If you are looking for investing for three years, income funds will also give exposure to corporate bonds, which can improve the yield-to-maturity,” says Sivakumar.

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Another advantage of gilt funds is that expenses tend to be lower than income funds, because the fund is investing only in G-secs and need not worry about the credit quality of the papers. “Since gilt funds invest only in G-secs, they have no credit risk compared to income funds, which invest in corporate papers as well. There could be some volatility in yields, but over long-term, the interest rate volatility will reduce,” says Feroze Azeez, executive director at Anand Private Wealth Management.

Investing in income funds will also give investors the benefit of G-Secs, since most income funds have some exposure to G-Secs, says Hemant Rustagi, CEO, Wiseinvestadvisors. “While G-Secs are very safe, they will benefit only if you hold them till maturity. But the longer you hold, the higher is the volatility. And, if you go wrong in your interest rate call, you might be left with nothing,” he says.

Chougule adds that volatility in G-Secs primarily stems from the volatility in inflation. “RBI and the government's endeavour is to bring inflation down to four per cent and maintain it at that level. In that case, there will be no volatility in G-Secs, too,” he says.

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