Long term gilt funds beat Nifty in December quarter

Nikhil WalavalkarMoneycontrol Bureau

Indian investors are staring at one of those strange scenarios, when bonds beat equities amidst a bull run. After benefitting from the liquidity driven rally riding on high hopes from Narendra Modi government, equities took a breather and bonds ended up beating equities. For quarter ended 31 December 2014, long term gilt funds offered 7% returns as compared to 4% returns offered by CNX Nifty.

Global financial markets experienced volatility in December quarter, as WTI crude oil fell from USD 90 dollar per barrel to USD 53 dollar per barrel. “While the fall in crude oil prices affected the funds flow worldwide, high valuations of Indian equities were a cause of concern. After initial euphoria of high hopes from BJP government died, investors were worried about slow pace of reforms,” says Jitendra Panda, MD& CEO, Peerless Securities. No wonder investors decided to book some profits and Nifty saw a loss of 3.2% in December month.

When the equities were volatile the information flow on macroeconomic front however was conducive to a hope of a cut in interest rates. Fall in crude oil prices indicated low inflation in Indian economy and low fiscal deficit. “Interest rates are on their way down which benefitted mutual fund schemes that took duration call by investing in long term government securities,” says Jignesh Shah, Investment Advisor of Capital Advisors. 10 year benchmark bond yield came down to 7.86% from 8.51% in December quarter.

Investors are betting on fall in interest rates in the economy and the best way to play the falling interest rates would be through long term gilt funds, which offer investors exposure to long term bonds without taking any credit risk. Smart investors have realized this and there is a sustained rise in assets under management of gilt funds. On November 30, gilt funds as a category managed assets worth Rs 7099 crore as compared to Rs 5619 crore as of September 30. However experts advise investors to take an informed decision based on their investment needs and not solely base their investment decisions on short term price performance of asset classes.

“Nifty may remain range bound in January. Earnings announcement and news flow on budget will decide future course of equities,” says Jitendra Panda. Though equity markets are expected to remain range bound in near term there is no point dumping equities. “If you are a long term investor looking for growth oriented portfolio equities are the best asset class for you. Those with a short to medium term view can look at gilt funds,” says Jignesh Shah. He prefers Birla Sun Life Government Securities Fund - Long Term Plan and ICICI Prudential Long Term Gilt Fund - Regular Plan to benefit from expected fall in interest rates. Gains in gilt funds are taxed at 20% with indexation if investors hold on to their investments for at least three years. Otherwise capital gains are taxed at marginal rate of tax.