INSUBCONTINENT EXCLUSIVE:
Investors could start a oneyear systematic investment plan (SIP) in gilt schemes, a mutual fund product that invests in government
securities, say investment advisors and money managers.
With yields on government bonds expected to peak out in the next year or so, a SIP
— a regular investment plan akin to recurring deposits of banks — would help investors tide over the volatility in these bonds and build
a corpus that could benefit from the subsequent easing of yields.
Bond yields and prices move in opposite directions: when yields rise,
prices fall and vice versa
Investors in gilt funds look to bet on fall in bond prices or falling yields
Currently, yields are rising on expectations the RBI would tighten interest rates.
“Invest in a gilt fund over the next one year and stay
through the volatility as interest rates are likely to be volatile
After that stay put for the entire rate cycle to reap the returns,” said Rajeev Radhakrishnan, head of fixed income, SBI Mutual Fund.
A
SIP will help them average their investments as yields peak out over the next one year and earn annualised double-digit returns over the
next interest rate cycle or three years.
Once this investment is done, through SIP for one year, they can just hold on to their investments
for the next 2-3 years to get maximum benefits of the interest rate cycle and tax benefits through indexation
“By staying put over the interest rate cycle investors can earn interest income as well as stand a chance to earn a capital
appreciation,” said Rupesh Bhansali, Head (Distribution), GEPL Capital.
While it is difficult to predict when interest rates would peak
out in a rising interest rate environment, Bhansali believes interest rates could peak out over the next six months and on the higher end
the 10-year benchmark could move up by another 25-50 basis points from the current levels of 8 per cent.
Fund managers in gilt funds have
the ability to actively manage duration
As interest rates decline, they can raise duration and many a time could take it to even as high as 15-20 years.
If interest rates were to
decline by 200 basis points over the next 3-4 years, and the portfolio has a duration of 10 years, investors could stand to earn a capital
appreciaton of 2.5-3 per cent every year
Adding the interest income of 8 per cent every year and a capital appreciation of 2.5 per cent every year, investors stand to earn an
annualised 10.5-11 per cent every year on their investment.
Financial planners say that gilt funds score over credit funds or corporate
bonds as there is no credit risk and capital protection is more or less guaranteed as they invest into government securities
Also, such funds score as retail investors find it difficult to access government securities on their own.
