Gilt funds are also the best option to invest in among debt funds when long-term interest rates are expected to fall
Gilt funds are a niche category of debt funds that primarily invest in government securities. These include securities issued by the Centre and various states. As the credit quality of the sovereign is generally considered to be the highest among all types of debt issuers, such a fund carries minimal credit risk. It does not invest in corporate debt instruments. Hence among all types of debt funds, gilt funds carry the least credit risk.
While retail investors can take exposure to government securities directly either through bank branches (or their online portals), stock exchanges or apply to RBI for allotment in the weekly primary auctions. Operationally these routes are a bit more cumbersome and they also require the investor to have either a demat account or CSGL account, pay DP charges, transaction charges and if bought/sold through banks or PDs buy at the price offered by them which maybe higher/lower than the market.
The other way to take exposure to government securities is by investing through dedicated gilt schemes offered by mutual funds. Since MF schemes are pooled offerings where savings of many investors are accumulated, the size of scheme is typically large enough to trade in the institutional gilt market where normal lot size is R5 crore. The NAV of a gilt scheme reflects the actual fair market value of government securities as traded in the market at the end of day. Also gilt schemes by virtue of their size can invest in a basket of securities across the yield and maturity spectrum.
Gilt funds are also the best option to invest in among debt funds when long-term interest rates are expected to fall. This is because the duration and average maturity of gilt funds is much higher than other categories of debt funds say liquid funds or short term funds and hence prospect of higher MTM (mark-to-market) or capital gains is also higher. One can choose between actively managed or passive ETF type funds. Most gilt funds do not charge exit load. Hence investment period can be as short as one desires.
There are three very powerful reasons why in the current scenario retail investors should seriously consider gilt schemes. First, the reduction in rates of various small savings instruments like NSC, KVP, Postal deposit schemes etc in the range of 30-130 bps across various tenors which was traditionally a popular avenue of investments for retail investors.
This has considerably reduced the differential between government securities and such instruments. Secondly, we are in a period when credit environment is weak with banks reporting increasingly higher NPAs in their loan books and credit rating downgrades of several corporates particularly those in the metals/infra/power space.
Hence it would be prudent to increase allocation to schemes with relatively low credit risk instruments. Here the gilt funds occupy prime space considering that these funds take only sovereign exposure. Thirdly the liquidity offered by gilt schemes makes up for the yield differential which maybe there with popular saving options like the ones mentioned before or even tax free bonds, all of which have long maturity periods or lock-in. Gilt funds especially those with nil entry load can be liquidated at a day’s notice anytime by the investor.
Looking at the performance of gilt funds at the present juncture, they have indeed done well with median category compounded annualized returns in the range of 8.5% (three-year period), 12% (two-year period) and 9% (one-year period). A host of economic factors including RBI’s accommodative monetary policy stance, stable CPI inflation, prospects of good monsoon, RBI’s OMO (Open Market Operations) purchases of dated gilt securities and still weak global and domestic growth environment make a case for retail investors to consider gilt schemes favourably.
The writer is head, fixed income, Principal Pnb AMC