Gilt funds are offering around 9% returns in one year. Should you invest?

Long duration debt mutual funds and gilt funds are among the toppers in the return chart. In fact, these two categories are currently offering better returns than many equity mutual fund categories in the one-year horizon. Long duration debt funds have given 7.61 per cent in one year and the gilt funds have given an average return of 8.23 per cent in the same period. Some of the gilt funds have given around 11 per cent in one year. No wonder, many investors want to know whether this is a good time to start investing in the long duration debt mutual funds?

“Gilt funds and long duration bond funds have been doing exceptionally well because of the sharp rally in yields. The 10-year yield rallied from above 8 to 7.5 recently. This directly benefited the long duration bonds,” says Arvind Chari, head of fixed income, Quantum Advisors. Long duration funds had been going through a bad phase in the last quarter of 2018 when the yields moved up sharply.

However, mutual fund advisors and debt fund managers had been asking investors to stay away from long duration funds. The primary reason for this advice was because of the change in monetary policy stance by the RBI last year. Fund managers believe that with the expectations of rate easing in the coming quarters, we might see the long duration funds rallying even more. “With the RBI stance changing again, there might be a rally in long duration funds. There is a room for rate cuts in the coming time and that might be helpful for the long term bond funds,” says Kumaresh Ramakrishnan, Head- fixed income, DHFL Pramerica Mutual Fund.

So, should you invest in these schemes? The answer is not a big yes. Mutual fund managers believe that even though there is a rally in the long duration segment, the debt market is likely to remain volatile because of the uncertainties hovering around the horizon. “We don’t think it is going to be a smooth rally for a long time. The government’s borrowing program is starting in April, so there could be a lot of pressure on the long duration bonds. Hence, we are expecting volatility in the segment,” says Arvind Chari.

Mutual fund experts have been backing the short-to-medium duration debt mutual funds since last year. They believe that these categories are the best bet for debt mutual fund investors in the current scenario. “I believe short duration funds or medium duration funds and even accrual funds could be a good investment option, better than long duration funds at this point,” says Kumaresh Ramakrishnan.