Staggered investment in gilt funds may help beat inflation

Investors could consider staggered investments over the next six months in debt mutual funds such as gilt schemes which bet on long-term government securities. Fund managers believe the Reserve Bank of India's move to leave the repo rate unchanged at 6.5% with a focus of bringing inflation down presents an opportunity to long-term fixed-income investors. Investments in such funds with a two- to three-year view would help earn about 200 basis points above inflation, they believe.

"The 10-year benchmark yield above 7% presents a good opportunity for long-term fixed-income investors to stagger their investments into long-tenure funds over the next four-six months" said Sandeep Bagla, chief executive at Trust Capital. Such a strategy would help investors beat inflation and also earn a capital appreciation when interest rates fall, according to him.

Fund managers believe the near-term rates are likely to be volatile and could move a bit higher given the RBI indication of open market operations to manage liquidity. This move has already pushed up the 10-year benchmark by 13 basis points to 7.38%. In the last quarter, the 10-year benchmark bond yield had risen just 20 bps. A note by Franklin Templeton Mutual Fund says with the likelihood of core inflation staying sticky and likely moderation in growth, the easing rate cycle could only start in the fourth-quarter of calendar 2024, in the form of shallow cuts.


"Given the current growth-inflation dynamic in India, we think that RBI will be on a long pause with no pressing need to cut rates at least till this fiscal year end. The 10-year benchmark will trade in a range of 7.25-7.60% over the next couple of months," said Puneet Pal, head - fixed income at PGIM India Mutual Fund. Pal believes yields are entering an attractive territory and it is the right time for investors to start increasing their allocation to fixed income at the longer end of the curve and says investors can look at funds having a duration of 3-4 years with predominant sovereign holdings.

"Yields are close to a peak and it is time for investors to take a duration risk," said Ashish Shanker, CEO, Motilal Oswal Wealth. He believes investors with a three-year view can consider long-tenure gilt funds like the Bharat Bond ETF that matures in 2030 or Nippon Nivesh Lakshya, that invests in long-tenure government bonds.

Financial planners prefer G-sec funds over corporate bond funds given the low spread between AAA-rated bonds and G-secs.

"Given that the spread between AAA-rated bonds and gilt funds is just 25-40 basis points, it is better to stick to government securities. Investors can stagger their investments into gilt funds over the next three-six months," said Rupesh Bhansali, head (distribution), GEPL Capital. He recommends target maturity funds that mature between 2026 and 2030 or Gilt funds.