You are here: Home » PF » Features » MFs
Business Standard

Dynamic bond funds a better option than gilt

In the former, funds change the maturity and asset mix depending on the market situation, giving it stability. The latter is too volatile

Tinesh Bhasin  |  Mumbai 

Dynamic bond funds are better option than gilt
  • ALSO READ

    Income accrual, dynamic bond funds turn attractive Should you invest in gilt funds now? Dynamic bond funds spawn highest absolute returns: Amit Tripathi Life insurers oppose mandatory investment of Ulip funds in G-secs

The recent spike in returns of gilt funds has attracted investors’ attention. With interest rates expected to gradually go down in the future, many are contemplating whether investing in gilt can reap rich rewards.

If you look at a one-year period, medium- and long-term gilt funds have average returns of 10.57 per cent. The best performing one, Government Securities Fund, has 12.84 per cent, according to Value Research. Edelweiss Gilt Fund has the lowest returns at 7.53 per cent. A majority of them have 10 per cent returns.

However, according to analysts and financial planners, gilt funds are not an ideal choice for retail investors if they have an investment horizon of two years. Mutual fund platforms such as Fundsupermart, FundsIndia, and financial planners suggest either or income accrual schemes. “As medium- and long-term gilt funds have a high portfolio maturity, they tend to be extremely volatile,” says Suresh Sadagopan, a certified financial planner.

The bulk of gilt fund returns come only during the rate cut, after which they are normalised. These funds are also more sensitive to currency movement; the government’s borrowing programme; and supply and demand. For example, in the past month, the returns from gilt funds are negative (category average is -0.17 per cent). “As these funds are fully invested into of a longer tenure, the interest rate movement becomes very crucial for this category. Hence, these funds are subject to huge volatility that retail investors would generally not be comfortable with,” says Renu Pothen, research head at Fundsupermart.com.

Lakshmi Iyer, chief investment officer (debt) and head of products at Kotak Mahindra AMC, says that while bond funds as well as gilt might work for retail investors in the long-term, the latter carries interest rate risk and requires investor to be experienced to stomach it. Bond funds don’t take credit risk to the same extent.

Most analysts feel that to benefit from gilt funds, an investor needs to time the entry and exit. This requires taking a call on interest rates movements and a view on what the Reserve Bank of India will do in its credit policy. If it goes wrong, returns can get impacted. Sadagopan says that at present, there’s a general view that interest rates are gradually coming down and it’s been happening. In the past, in similar situations, there were periods when interest rates firmed up or spiked, pushing gilt fund returns into the negative territory.

Investors are, therefore, better off investing in or interest accrual schemes depending on their horizon. These funds keep a mix of corporate bonds and government securities (G-Secs). These funds also change the maturity of the portfolio and the investment mix depending on the scenario giving stable returns over the long term. “Depending on the fund manager’s view on interest rates, have the flexibility to move across different tenures and instruments and, hence, they would be less volatile than pure gilt funds,” says Pothen. In the current scenarios, for example, many have raised the exposure in the portfolio.

This is also apparent if you look at the returns over the long-term of best-rated funds by Value Research. Some of the five-star gilt funds in their worst performance have had negative returns in double digit for one-year period, whereas five-star rated never went negative in one year period.

For retail investors, timing gilt fund is difficult, say experts. Also, it’s not tax-efficient to move in and out of debt schemes for superior returns of few basis points.

RECOMMENDED FOR YOU

Dynamic bond funds a better option than gilt

In the former, funds change the maturity and asset mix depending on the market situation, giving it stability. The latter is too volatile

In the former, funds change the maturity and asset mix depending on the market situation, giving it stability. The latter is too volatile The recent spike in returns of gilt funds has attracted investors’ attention. With interest rates expected to gradually go down in the future, many are contemplating whether investing in gilt can reap rich rewards.

If you look at a one-year period, medium- and long-term gilt funds have average returns of 10.57 per cent. The best performing one, Government Securities Fund, has 12.84 per cent, according to Value Research. Edelweiss Gilt Fund has the lowest returns at 7.53 per cent. A majority of them have 10 per cent returns.

However, according to analysts and financial planners, gilt funds are not an ideal choice for retail investors if they have an investment horizon of two years. Mutual fund platforms such as Fundsupermart, FundsIndia, and financial planners suggest either or income accrual schemes. “As medium- and long-term gilt funds have a high portfolio maturity, they tend to be extremely volatile,” says Suresh Sadagopan, a certified financial planner.

The bulk of gilt fund returns come only during the rate cut, after which they are normalised. These funds are also more sensitive to currency movement; the government’s borrowing programme; and supply and demand. For example, in the past month, the returns from gilt funds are negative (category average is -0.17 per cent). “As these funds are fully invested into of a longer tenure, the interest rate movement becomes very crucial for this category. Hence, these funds are subject to huge volatility that retail investors would generally not be comfortable with,” says Renu Pothen, research head at Fundsupermart.com.

Lakshmi Iyer, chief investment officer (debt) and head of products at Kotak Mahindra AMC, says that while bond funds as well as gilt might work for retail investors in the long-term, the latter carries interest rate risk and requires investor to be experienced to stomach it. Bond funds don’t take credit risk to the same extent.

Most analysts feel that to benefit from gilt funds, an investor needs to time the entry and exit. This requires taking a call on interest rates movements and a view on what the Reserve Bank of India will do in its credit policy. If it goes wrong, returns can get impacted. Sadagopan says that at present, there’s a general view that interest rates are gradually coming down and it’s been happening. In the past, in similar situations, there were periods when interest rates firmed up or spiked, pushing gilt fund returns into the negative territory.

Investors are, therefore, better off investing in or interest accrual schemes depending on their horizon. These funds keep a mix of corporate bonds and government securities (G-Secs). These funds also change the maturity of the portfolio and the investment mix depending on the scenario giving stable returns over the long term. “Depending on the fund manager’s view on interest rates, have the flexibility to move across different tenures and instruments and, hence, they would be less volatile than pure gilt funds,” says Pothen. In the current scenarios, for example, many have raised the exposure in the portfolio.

This is also apparent if you look at the returns over the long-term of best-rated funds by Value Research. Some of the five-star gilt funds in their worst performance have had negative returns in double digit for one-year period, whereas five-star rated never went negative in one year period.

For retail investors, timing gilt fund is difficult, say experts. Also, it’s not tax-efficient to move in and out of debt schemes for superior returns of few basis points.
image
Business Standard
177 22

Dynamic bond funds a better option than gilt

In the former, funds change the maturity and asset mix depending on the market situation, giving it stability. The latter is too volatile

The recent spike in returns of gilt funds has attracted investors’ attention. With interest rates expected to gradually go down in the future, many are contemplating whether investing in gilt can reap rich rewards.

If you look at a one-year period, medium- and long-term gilt funds have average returns of 10.57 per cent. The best performing one, Government Securities Fund, has 12.84 per cent, according to Value Research. Edelweiss Gilt Fund has the lowest returns at 7.53 per cent. A majority of them have 10 per cent returns.

However, according to analysts and financial planners, gilt funds are not an ideal choice for retail investors if they have an investment horizon of two years. Mutual fund platforms such as Fundsupermart, FundsIndia, and financial planners suggest either or income accrual schemes. “As medium- and long-term gilt funds have a high portfolio maturity, they tend to be extremely volatile,” says Suresh Sadagopan, a certified financial planner.

The bulk of gilt fund returns come only during the rate cut, after which they are normalised. These funds are also more sensitive to currency movement; the government’s borrowing programme; and supply and demand. For example, in the past month, the returns from gilt funds are negative (category average is -0.17 per cent). “As these funds are fully invested into of a longer tenure, the interest rate movement becomes very crucial for this category. Hence, these funds are subject to huge volatility that retail investors would generally not be comfortable with,” says Renu Pothen, research head at Fundsupermart.com.

Lakshmi Iyer, chief investment officer (debt) and head of products at Kotak Mahindra AMC, says that while bond funds as well as gilt might work for retail investors in the long-term, the latter carries interest rate risk and requires investor to be experienced to stomach it. Bond funds don’t take credit risk to the same extent.

Most analysts feel that to benefit from gilt funds, an investor needs to time the entry and exit. This requires taking a call on interest rates movements and a view on what the Reserve Bank of India will do in its credit policy. If it goes wrong, returns can get impacted. Sadagopan says that at present, there’s a general view that interest rates are gradually coming down and it’s been happening. In the past, in similar situations, there were periods when interest rates firmed up or spiked, pushing gilt fund returns into the negative territory.

Investors are, therefore, better off investing in or interest accrual schemes depending on their horizon. These funds keep a mix of corporate bonds and government securities (G-Secs). These funds also change the maturity of the portfolio and the investment mix depending on the scenario giving stable returns over the long term. “Depending on the fund manager’s view on interest rates, have the flexibility to move across different tenures and instruments and, hence, they would be less volatile than pure gilt funds,” says Pothen. In the current scenarios, for example, many have raised the exposure in the portfolio.

This is also apparent if you look at the returns over the long-term of best-rated funds by Value Research. Some of the five-star gilt funds in their worst performance have had negative returns in double digit for one-year period, whereas five-star rated never went negative in one year period.

For retail investors, timing gilt fund is difficult, say experts. Also, it’s not tax-efficient to move in and out of debt schemes for superior returns of few basis points.

image
Business Standard
177 22

Upgrade To Premium Services

Welcome User

Business Standard is happy to inform you of the launch of "Business Standard Premium Services"

As a premium subscriber you get an across device unfettered access to a range of services which include:

  • Access Exclusive content - articles, features & opinion pieces
  • Weekly Industry/Genre specific newsletters - Choose multiple industries/genres
  • Access to 17 plus years of content archives
  • Set Stock price alerts for your portfolio and watch list and get them delivered to your e-mail box
  • End of day news alerts on 5 companies (via email)
  • NEW: Get seamless access to WSJ.com at a great price. No additional sign-up required.
 

Premium Services

In Partnership with

 

Dear Guest,

 

Welcome to the premium services of Business Standard brought to you courtesy FIS.
Kindly visit the Manage my subscription page to discover the benefits of this programme.

Enjoy Reading!
Team Business Standard