Use yield spikes to buy into gilt funds

Use yield spikes to buy into gilt funds

Source >> Business Standard

This past year has been a tumultuous one for gilt funds. With the 10-year government security yield surging from 7.83 per cent to 8.9 per cent, gilt funds have been hit badly.

Last week, the 10-year G-sec yield suddenly spiked to 9.1 per cent due to heavy selling. This has taken a heavy toll on the performance of medium-term and long-term gilt funds. According to data from Value Research, this category has been the worst performer of all fund categories in the year past, with the return merely 1.8 per cent. For debt funds as a whole, this is unusually low. The question is if it will continue to be sluggish.

Not likely, say experts. Instead, such a yield in the 10-year G-sec offers investors an excellent opportunity to invest. Says Dhawal Dalal, head, fixed income, DSP BlackRock Mutual Fund: "Investors should not look at the past performance of gilt funds but focus on yield, very attractive at these levels. Investors should not worry about volatility in this category but use it to move into these funds whenever yields are high."

Gilt funds as a category are more sensitive to interest-rate movements in the market. Hence, these might show higher volatility. When yields rise, as happened last year, gilt funds that hold government bonds fall and the net asset values take a hit. As yields fall, the returns from gilts can move up as bond prices rise. For instance, as yields surged last week, returns over the fortnight for this category was a negative 0.2 per cent. But as rates started easing from 9.1 to 8.9 per cent, the returns last week were positive at 0.49 per cent. Such huge swings in returns might be unnerving in the short term. But, given where yields are now, long-term returns could be substantial.

Experts note the macro economic fundamentals are more stable now and indications are that inflation and, therefore, G-sec yields could ease.

Says R Sivakumar, head, fixed income, Axis MF: "The macro variables have gotten better. These are times when yields are high but, as time progresses, inflation is clearly expected to drop. As inflation hits the Reserve Bank target, G-sec yields will also come down, offering an opportunity to make above-average returns." If yields come down, investors should see government bond prices surge in the next one or two years. Thus, they'd make money from interest as well as bond gains, which might see overall returns from gilt investments in double digits.
Thanking you

Regards,

Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com


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