Get out of gilt funds now, say mutual fund advisors

By Shivani Bazaz

Mutual fund advisors are asking their clients with investments in long term gilt mutual fund schemes to get out of them before it is too late. The long-term gilt funds have been going through a bad phase since the Reserve Bank of India changed its monetary stance in February 2017.

“We have been asking the investors to get out of these schemes for the last six months. Since a lot of investors don’t believe that debt funds can be risky, their capital might be in danger,” says Puneet Oberoi, Founder, Excellent Investment Advisorz.

Gilt schemes invest mostly in government securities and government securities are extremely sensitive to interest rate changes. They suffer the most when the rates start going up. Many money market participants believe that RBI may start hiking rates in the coming months. Many experts are forecasting a hike of a half percent hike in policy rates during the calendar year.

The gilt schemes saw a net outflow of Rs 1,192 crore and Rs 1,621 crore in January and February respectively. The long-term debt funds, especially the gilt schemes had taken a hit after the RBI stopped easing policy rates in 2017. The rising bond yields pushed these funds down further. Gilt funds returned 2.63 per cent in the last one year and -1.41 per cent
in three months.

“Many investors did move out, but many are still there. The reason being the lack of awareness about risk involved in debt schemes. Many investors don’t even look at their performances regularly. Moreover, gilt is a misnomer. Investors fall into the trap of them being government bonds and thus highly safe avenues,” says Nisreen Mamaji, CEO, MoneyWorks Financial Adivosrs.

With the RBI still holding on to its neutral stance, market participants believe the banking regulator is done with the rate cuts. “We do not expect any rate cuts going further and the MPC might hold the rates. But, if there is a hike in the interest rates, it would be bad news for gilt investors,” says Puneet Oberoi.

If there is a rate hike, debt schemes with a higher average maturity would suffer the most. Because of the inverse relationship between bond yields and prices, when the yields starts moving up after a policy hike, the bond prices fall. This drags down the Net Asset Value of long-term debt schemes.

Where should you invest then? “The entire point of investing in debt is safety with a little extra return. Gilt is not a good option for investors expecting this. I would suggest investors to invest in accrual funds. If you are investing for a shorter period, go for ultra short-term funds,” says Nisreen Mamaji. Puneet Oberoi also believes that betting on shorter duration is the safest at this point. “Shorter-duration funds are the best place to be. If you are eyeing a little longer term, go for corporate bond funds or credit opportunities fund in accordance to your risk profile,” says Puneet Oberoi.

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Via:: Economic times – Wealth


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