December 7, 2021

The World Stock Markets Tips & Targets, News, Views & Updates

The World Stock Markets Tips & Targets, News, Views & Updates

YOUR QUERIES: MUTUAL FUNDS: Go for gilt funds positioned around the medium-to-long term segment of the yield curve

To gain from a favourable tax treatment, investments in gilt funds should be at least over 3-year holding periods. For holding periods of over 3 years, the gains are taxed at 20.8% (including cess) post indexation of costs.To gain from a favourable tax treatment, investments in gilt funds should be at least over 3-year holding periods. For holding periods of over 3 years, the gains are taxed at 20.8% (including cess) post indexation of costs.To gain from a favourable tax treatment, investments in gilt funds should be at least over 3-year holding periods. For holding periods of over 3 years, the gains are taxed at 20.8% (including cess) post indexation of costs.

Is it a good time now to invest in gilt funds as the interest rates have bottomed out?
—D R Joshi
Gilt funds are fixed-income funds with a mandate to invest at least 80% of the assets into G-secs. These funds have no exposure to corporate securities and no restriction on the duration position-ing of the fund. As of October 2021, gilt funds have a modified duration ranging from 2.6 to 7.7 years. Since 2019, the RBI has cut the policy rate sharply and announced steps to support the slowdown in the economy.

These measures along with abundant liquidity in the banking system resulted in yields falling across the yield curve, particularly at the shorter end leading to a steepening of the yield curve. Currently, the medium-end of the curve (4 to 7 year segment) offers an attractive yield pick-up relative to the shorter end (1 to 3 year segment) of the curve.

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With further normalization of liquidity conditions by RBI, we may see the yield curve flatten resulting in short term interest rates rising more than the longer-end of the curve which is now close to the pre-pandemic levels (December 2019). Hence, gilt funds positioned around the medium-to-long term segment of the yield curve present a reasonable opportunity currently and a small allocation of around 5 to 7% of one’s portfolio can be considered.

Corporate bond spreads have narrowed significantly compared to their long-term averages; subsequent widening of spreads could present additional downside risk to investors. Hence, gilt funds also score above corporate bond funds at this juncture.

Funds maintaining a higher duration are more volatile due to higher sensitivity to changes in interest rates, and as a result present potentially higher mark-to-market risk. However, these would deliver subdued performance in case interest rates move north. Investors should consider the suitability of gilt funds from an overall portfolio perspective and make allocations in line with their risk-appetite.

To gain from a favourable tax treatment, investments in gilt funds should be at least over 3-year holding periods. For holding periods of over 3 years, the gains are taxed at 20.8% (including cess) post indexation of costs.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to [email protected]

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