GILT Funds…. Invest safe

Many of you must be remembering those days in the year 2001 when the equity markets were down and the IT bust ensured that most of you would remain out of the market. In those days, we used to recommend income funds and long term gilt funds to all our customers and in those days the long dated gilt funds offered double digit return performance till the year 2003-2004. At that moment of time the Indian equity markets showed the signs of revival and there came the interest in equities.Things have come a long way in the last 4 years. The markets have tripled and we are sitting tight on good money. But at these heights there is a segment of investors who are worried about the market valuations and seek a diversification.

This is not the only worried class in the market. Another class of investors that is worried about the future is the class of pensioners. These guys typically live life on interest income. For last couple of years they were also happy lot. The interest rates were moving up and they enjoyed good interest income (though the real interest rates said to be low as the inflation was high). As there are talks that the rates are headed southwards, these guys turned cautious about future.

SBI, the biggest bank in India, has slashed the interest rates on loans and also went on reducing the interest rates on certain deposits. Now it is the time to give a serious thought as to where would the pensioners get some relief.

The long dated gilt funds are one such area where you may get some solace if you are a pensioner. If you are a equity fan and are sitting tight on huge pile of money, gilt funds are a must for you.

What are gilt funds?

For those who are not aware of this term, the gilt funds are those mutual fund schemes that invest in government securities. Investment in government securities fetches you highest level of safety as it is almost immune from default. But a word of caution, the interest rate sensitivity can kill the earnings potential of the scheme as they are marked to market.

Let us understand this in greater details. When you invest in a government security, you should first make a note of the rate of interest cycle. If the interest rate goes down the price of the bond rises and vice versa. This is primarily because if the coupon rate of the bond becomes higher than the prevailing rate of interest, people are willing to pay more for such a bond.
You just have to capture the same. Now as the rate of interest is due to move southwards, the bond portfolios of the mutual funds’ gilt funds should move upwards. This ensures that you gain. The capital gains here are far more than the coupon payments that you receive.

Taxation

These are not equity schemes and hence not as tax efficient as they are. Here investors have to look at long term capital gains post indexation.

Strategy

Take a systematic exposure to the gilt funds over next six months. Choose a systematic investment plan. Even one stroke investments will not create any big difference.

Risks

You need to keep a track of the interest rate movements. Any upward move in interest rates will mar returns here. Returns are certainly volatile here.

Another option
For those who are not willing to bare the volatility of returns do have a look at income funds.

Good candidates:
Birla Gilt Plus, Magnum gilt, ICICI Prudential long term gilt, Reliance gilt long term. Please choose the regular plan as most don’t have any load.

Disclosure:

Our clients do have significant amount of investments in this asset class. We are interested party in the above class.

Note: The fund AUMs of some of the funds are swelling showing the movement of shrewed investors.