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Government securities seem the flavour of the season. The money in ‘gilt’ schemes has more than doubled in the last one year to Rs 8,200 crore in February from Rs 3,675 crore.
Apart from mutual funds that invest only in gilt schemes, other debt funds have also been raising investments in Government securities (G-secs). Debt fund investments of Rs 45,712 crore in G-secs in January 2013 were six times that in the same month last year. G-secs now account for nearly 8 per cent of debt funds’ assets — highest in recent years.
Chasing returns
The renewed interest in this category follows the nearly 11 per cent returns gilt funds earned in 2012 after making single-digit, or even negative, returns in previous three years. The rebound in gilt fund returns comes on the back of recent interest rate cuts.
Gilt funds returns climb when interest rates dip. This is because in a falling rate scenario, older G-secs that carry high coupon see a spike in demand. This demand pushes up G-sec prices, boosting the net asset value of gilt funds. In 2008, when the RBI cut the repo rate by 4.25 percentage points, gilt fund NAVs gained 29 per cent.
Will it sustain?
But gilt fund returns have often proved a flash in the pan. For instance, the high returns of 2008 quickly gave way to losses in 2009 as interest rates rose again. Gilt funds have done better than dynamic bond funds (which switch between debt securities) only twice in the last six years.
This is why fund managers suggest it is safer for retail investors to invest in dynamic bond funds as gilt funds demand a certain timing of entry and a view on interest rate movements.
Arvind Chari, Senior Fund Manager (Fixed Income), Quantum Asset Management Company, says: “We recommend that retail investors should still look at liquid funds for cash management, fixed deposits for lock-in, and then allocate the rest into a dynamic bond funds.” In Chari’s opinion, the RBI may not make any more aggressive rate cuts, and this would keep gilt yields range bound.
Says Dhruva Chatterji, Senior Analyst at Morningstar, “Investors who cannot take volatility in returns, or who are more passive, can choose investment avenues such as dynamic bond funds if they want to capitalise on the fall in interest rates. Fund managers in any case have been increasing exposure to gilts in their underlying portfolios.”
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