Your queries (Mutual Funds): Go for gilt funds holding G-Secs of around 5-year maturity

Historically, the spread has moved in the range of 1-1.5%. Hence, from a risk-reward perspective, the medium to long term segment looks attractive.

As liquidity conditions normalise, we may see the yield curve flatten resulting in short-term interest rates rising more than the longer-end of the curve. Hence, gilt funds positioned around the medium-term segment of the yield curve offer an attractive opportunity currently.
As liquidity conditions normalise, we may see the yield curve flatten resulting in short-term interest rates rising more than the longer-end of the curve. Hence, gilt funds positioned around the medium-term segment of the yield curve offer an attractive opportunity currently.

Should I invest in gilt funds now?
—Yatinder Sharma

Gilt funds are fixed-income funds with a mandate to invest at least 80% of the assets into G-secs. These funds have no exposure to corporate bonds and hence do not involve any credit risk and have no restriction on the duration positioning of the fund. Currently, the medium to long-end of the curve (5 to 10-year segment) offers an attractive yield pick-up relative to the shorter end (1 to 3-year segment) of the curve. The 1-year Treasury Bill currently offers a yield of 4.55% whereas the 10-year government security trades at a yield of around 6.8%, resulting in a spread of 2.25%. Historically, the spread has moved in the range of 1-1.5%. Hence, from a risk-reward perspective, the medium to long term segment looks attractive.

As liquidity conditions normalise, we may see the yield curve flatten resulting in short-term interest rates rising more than the longer-end of the curve. Hence, gilt funds positioned around the medium-term segment of the yield curve offer an attractive opportunity currently.

Corporate bond spreads have narrowed significantly compared to their long-term averages; subsequent widening of spreads could present additional downside risk to investors. Hence, gilt funds also score above corporate bond funds at this juncture. Investors should consider the suitability of gilt funds from an overall portfolio perspective and make allocations in line with their risk appetite.

What are the benefits of investing in balanced advantage funds?
—Rakesh Sharma

Balanced advantage funds are a category of hybrid funds, following an asset-allocation approach with the flexibility to invest dynamically into equity and fixed-income based on the fund manager’s views across asset classes. Asset-allocation calls are taken by the fund manager at his/her sole discretion, relieving investors of the need to decide their asset allocation on their own. To lower drawdown risk during volatile or adverse market phases, such funds can also lower net equity position by hedging some of the long equity positions if they find equity markets to be richly valued. They maintain a gross exposure of at least 65% to equities, to retain the favourable equity taxation.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com

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