Gilt funds see record monthly outflows in December

“Investors seem to have realised that we are at the fag-end of the rate-cut cycle. Any cut can only happen if there is leeway, but with inflation going up there is not much room for cuts,” says Marzban Irani, chief investment officer of LIC Mutual Fund (MF).

Irani also points out that the Organisation of Petroleum Exporting Countries (OPEC) have already talked about cutting oil production. “The economic activity is expected to return in 2021 and global oil prices are expected to inch up. If the government passes the oil prices to end-consumers, this would lead to inflation. If they don’t, it would widen government’s fiscal deficit, which would mean higher government borrowing and upward pressure on yields,” he says.
Also read: How you can profit from gilt funds’ fluctuating fortunes

“Yields have reached historical lows, so may be investors are taking profits off the table,” says NS Venkatesh, chief executive of AMFI.

In last one year, the gilt funds have delivered average returns of 11.99 percent. During this period, the domestic yield on ten-year government securities has moved from 6.57 percent to 5.89 percent.

When yields go down, bond prices rise, and when yields move up, bond prices decline.

While gilt funds do not carry any credit risk, as they come with an implicit sovereign guarantee, these funds carry high interest-rate risks.

In the current market environment, financial planners suggest investors put money in shorter duration debt funds, where there is limited credit risk and interest-rate risk.

“Within debt, it is advisable to make investments in shorter duration funds like liquid, ultra-short duration, short duration and corporate bond funds. These categories are aligned towards triple-A-rated debt investments. As duration of these funds’ debt holdings tends to be less, the interest rate risk is low,” says Kalpesh Ashar, certified financial planner at Full Circle Financial Planners and Advisors.