Home >Money >Personal Finance >Gilt funds give over 15% in a year, but retail investors should stay away

Gilt funds are giving double-digit returns, over the past one-year period. Returns from these funds have risen as Reserve Bank of India had cut policy rates, which consequently brought down the yields on government securities (G-secs). As G-sec yields fall, their prices go up. The central bank is trying to keep the yields on G-secs low by undertaking various measures.

The returns from the gilt funds category with 10-year constant duration are 4.05% and 17.47% for three months and one-year periods, respectively, according to data from Value Research. The other gilt fund category, where funds can keep G-secs of different duration, has given 3.38% and 14.86% over the same time periods, respectively. Both categories invest almost their entire portfolios in G-secs.

With gilt funds giving far better returns than other debt fund categories recently, should you invest in them? Investment advisers say the funds are not for retail investors as they are highly volatile. “In gilt funds, the entry and exit need to be tactical. But for retail investors, timing the entry and exit is not possible. Unless a retail investor has a planner who can take such calls, they should avoid investing in gilt funds," said Malhar Majumder, a Kolkata-based financial planner and partner, Positive Vibes Consulting and Advisory.

High volatility

Gilts can be highly volatile as they are sensitive to the interest rate movement. Take SBI Magnum Gilt Fund as an example. This fund has the highest assets under management (AUM) of 2,433 crore among all gilt funds. In its history, the fund has returns of 6.24% in a week (19 August 2013 to 26 August 2013). But it has also seen a fall of 9.6% in a week (2 January 2009 to 9 January 2009). Such data holds for other gilt funds as well. It is difficult for retail investors to stomach such volatility.

The only way an investor can manage the volatility in a gilt fund is by staying with it for a long duration, which allows them to benefit from a cycle of rising and falling interest rates. The five-year average returns for gilt fund category, for example, is 8.89% and 10-year returns are 8.63%.

One of the principles of investing in debt fund is to match the investment tenure with portfolio maturity.

Other options

Instead of volatile gilt funds, investors can look at banking and PSU funds after studying their portfolios. The scheme should have at least 85% investment in AAA-rated papers, which have higher coupons with negligible default risk. Moreover, they typically have shorter durations which may suit debt investors better.

Another option is to invest in Bharat Bond ETFs that give some predictability of returns as a result of the roll-down strategy they follow. Prices on these funds are also sensitive to interest rate movement but not to the extent of gilt funds.

When investing, don’t get swayed by returns alone. Understand the risk associated with the instrument.

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