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With an interest rate cycle likely to go down later this year and the government ramping up its fiscal consolidation path, long term debt mutual funds are set to report higher gains.
Union Finance Minister Nirmala Sitharaman lowered its fiscal deficit target to 5.1 percent of the GDP for fiscal 2024-25. She also revised the fiscal deficit estimate for fiscal 2024 to 5.8 percent of GDP from the 5.9 percent estimated earlier for the financial year.
At the same time, the Reserve Bank of India (RBI) kept the repo rate constant at 6.5 percent for the sixth consecutive time, and fell short of the start of an interest rate cut cycle.
Experts, meanwhile, are anticipating repo rate cuts to happen in the subsequent monetary policy committee (MPC) meet(s) later in the year.
The SBI report said “The first repo rate cut could be on the table from June 2024. Aug'24 looks the best bet now.”
Once rate cuts start, lower bond yields will follow. And when bond yields go south, increase in bond prices follow.
Consequently, long duration and gilt mutual funds tend to rise.
“If the investor believes that the interest rate will go down and they want to bet on it, it is advisable to add duration to the portfolio. So, this can be done not only through mutual funds but through bonds as well,” says Deepesh Raghaw, Sebi-registered investment advisor.
“Investors wanting to invest for the next two years can consider investing in gilt mutual funds to earn high returns,” says Sridharan Sundaram, founder of Wealth Ladder Direct.
Let us understand what gilt mutual funds are?
Gilt funds are debt mutual funds, which invest a minimum of 80 percent of their assets in government securities (G-Secs) across maturity.
There are a total of 21 gilt mutual funds and five gilt funds with 10 years constant duration. The total asset size of the former is ₹26,740 crore and that of latter is ₹4,559 crore as on Jan 31, 2024, reveals the AMFI (Association of Mutual Funds in India) data.
“The convergence of factors such as impending interest rate cuts and the anticipated surge in demand for Indian gilts due to their inclusion in global bond indices makes it an advantageous time to consider investing in Indian gilt funds. Investors stand to benefit from potential capital appreciation and favourable yield movements in the coming months,” says Deepak Gagrani, Founder of Madhuban Finvest.
“The upcoming inclusion of Indian bonds in the JP Morgan Global Bond Index for Emerging Markets, scheduled for June 2024, is poised to inject approximately $23 billion into Indian government securities. This influx of funds is anticipated to create substantial demand for Indian gilts, subsequently driving down overall yields. ,” he adds.
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