Long-term gilt funds, which invest in government bonds with long-term maturity, including the 10-year benchmark bond, have been out of favour among many investors in the past year or so.
But analysts see merit in increasing exposure to these schemes since yields on 10-year government bonds are unlikely to rise much from these levels, with softening inflation expected to limit policy rate hikes by the RBI.
“At current yields on the 10-year benchmark bond, medium-to-long-term gilt funds are very good bargains,” said Devendra Nevgi, principal partner, Delta Global Partners.
“They can generate double-digit returns in the next 2-3 years,” he added. The yield on 7.80% benchmark bond maturing in 2020 was at 7.99% on Monday. It has been hovering around the psychological 8% mark in recent weeks, after rising from a low of 5.25%.
Bond yields and prices move in opposite direction; when yields rise, prices fall and vice-versa. Traders in long-term government bonds, including banks and mutual funds, rely on price jumps in this security to clock higher returns in their portfolios.
Some investors, mainly the affluent, have already started buying gilt fund units in a phased manner, similar to the systematic investment plan. These are investors, who are not sure about the extent of rise in bond yields, but don’t expect it to rise sharply from these levels.
Many debt market participants don’t expect the yield to rise beyond 8.15-8.25%. “By creating average at higher yields and with other fundamental factors, like lowering commodity prices, lowering inflation, higher revenue and other receipts by the government, affecting the market positively, the said strategy should pay good returns to the investor,” said Sunil Jhaveri, chairman, MSJ Capital, a New Delhi-based mutual fund advisor.
A fall in inflation is expected to reduce the pace at which the RBI hikes rates. Although a liquidity crunch is expected in September due to advance tax outflows and a possible interest rate hike by RBI, market participants said the crunch is expected to ease soon. Normally, the borrowings tend to be less in the second half of the year. So, the supply of g-secs tends to be less while there is an increase in demand.
“With tight liquidity conditions prevailing in the money market, banks have increased their deposit rates leading to higher deposit creation in the system which will create additional demand for g-secs,” said Ritesh Jain, head-fixed income, Canara Robeco Mutual Fund.
Source: http://economictimes.indiatimes.com/markets/stocks/market-news/Gilt-Fund-Units-back-in-favour-among-rich-investors/articleshow/6465074.cms
But analysts see merit in increasing exposure to these schemes since yields on 10-year government bonds are unlikely to rise much from these levels, with softening inflation expected to limit policy rate hikes by the RBI.
“At current yields on the 10-year benchmark bond, medium-to-long-term gilt funds are very good bargains,” said Devendra Nevgi, principal partner, Delta Global Partners.
“They can generate double-digit returns in the next 2-3 years,” he added. The yield on 7.80% benchmark bond maturing in 2020 was at 7.99% on Monday. It has been hovering around the psychological 8% mark in recent weeks, after rising from a low of 5.25%.
Bond yields and prices move in opposite direction; when yields rise, prices fall and vice-versa. Traders in long-term government bonds, including banks and mutual funds, rely on price jumps in this security to clock higher returns in their portfolios.
Some investors, mainly the affluent, have already started buying gilt fund units in a phased manner, similar to the systematic investment plan. These are investors, who are not sure about the extent of rise in bond yields, but don’t expect it to rise sharply from these levels.
Many debt market participants don’t expect the yield to rise beyond 8.15-8.25%. “By creating average at higher yields and with other fundamental factors, like lowering commodity prices, lowering inflation, higher revenue and other receipts by the government, affecting the market positively, the said strategy should pay good returns to the investor,” said Sunil Jhaveri, chairman, MSJ Capital, a New Delhi-based mutual fund advisor.
A fall in inflation is expected to reduce the pace at which the RBI hikes rates. Although a liquidity crunch is expected in September due to advance tax outflows and a possible interest rate hike by RBI, market participants said the crunch is expected to ease soon. Normally, the borrowings tend to be less in the second half of the year. So, the supply of g-secs tends to be less while there is an increase in demand.
“With tight liquidity conditions prevailing in the money market, banks have increased their deposit rates leading to higher deposit creation in the system which will create additional demand for g-secs,” said Ritesh Jain, head-fixed income, Canara Robeco Mutual Fund.
Source: http://economictimes.indiatimes.com/markets/stocks/market-news/Gilt-Fund-Units-back-in-favour-among-rich-investors/articleshow/6465074.cms
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