Advantage debt funds

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SummaryIn a falling interest rate scenario, government securities are an attractive investment option. Here’s why.

a host of policy initiatives. The gradual reduction in interest rates has ensured that debt MFs will generate healthy returns — similar to that in 2012, if not better. The government borrowing programme, which has an impact on gilt funds’ interest rate, will be another important factor.

However, investing in gilt funds is not entirely risk-free. Though it does not carry a credit risk — G-Secs have a sovereign guarantee — the interest rate risk is there. When interest rates rise, G-Secs fall, which, in turn, impacts return. Again, long-term G-Secs can be illiquid. If there is a redemption pressure, the funds will have to be liquidated at a loss.

Having said that, investors with a horizon of over a year could allocate funds based on the risk and time horizon in this product. Will returns generated in 2008-09 be revisited in gilt funds? It’s a conjecture. But what can be expected on a prudent note is inflation beating returns.

Allocation to gilt funds, based on the time horizon, in an investor’s portfolio should be actively considered. A falling interest rate scenario gives confidence of inflation beating returns.

The author is founder and managing partner of Zeus WealthWays LLP

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