How need to I look at investing in gilt funds? Can I count on to get steady returns more than a period of 5 years?
—Bhaskar Pant
Gilt funds are a category of fixed-revenue funds with a mandate to invest at least 65% of total assets into government securities (G-secs) across maturities. These funds involve no credit threat as they invest into sovereign instruments and therefore supply reasonably decrease yield relative to comparable duration corporate. However, the underlying portfolio is more liquid considering the fact that G-secs are normally reasonably more liquid than corporate debt securities.
Given these funds have no restriction on the duration to be maintained, this is a diverse category with funds possessing modified duration in the wide variety of 2 to 9 years (as of August 2021). Funds sustaining a larger duration are more volatile due to larger sensitivity to modifications in interest prices, and as a outcome topic investors to potentially larger interest price threat. Prices of fixed-revenue securities have an inverse relation with interest prices.
Given the steep yield curve at present, most funds are presently sustaining larger duration to advantage from larger yield on supply. However, funds sustaining longer duration could be impacted adversely if interest prices move upwards on issues more than more provide and monetary tightening amid higher inflation and the U.S. Fed stimulus taper.
The functionality of such funds could be volatile more than brief periods, and topic to the path of interest price movement. However, more than a reasonably extended horizon (at least 5 to 6 years), such funds can be anticipated to provide decent returns along with indexation positive aspects readily available for holding periods of more than 3 years. Such funds are more most likely to execute effectively close to the peak of the interest price cycle, with likelihood of a subsequent fall in interest prices which would lead to handsome capital gains. Investors could take into consideration such funds as portion of their tactical asset-allocation.
To obtain exposure to funds with reasonably steady returns, you could take into consideration investing into funds with reasonably low interest price and credit threat such as Banking PSU Funds, Corporate Bond Funds and ST Income funds. You might also take into consideration some exposure to floating price funds, which normally do effectively in a increasing interest price situation.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to