Gilt funds outperform sensex thanks to lower inflation, interest rate cuts

MUMBAI: Aided by a few rate cuts, gilt funds have outperformed the Sensex over periods of three months, six months and one year.

Gilt funds invest in medium and longterm government bonds and fetch maximum returns in a bond rally when prices of underlying assets rise. High networth individuals (HNIs) who bought gilt funds have been well rewarded.

With oil and commodity prices cooling off, the rupee stable relative to other currencies, and the RBI cutting repo rates by 50 basis points in two tranches, gilt funds have done well. According to Value Research, over the past six months, gilt funds have returned an average of 5.73%, while the Sensex lost 1.7%. For a one-year period, gilt funds are up 15.2%, while the Sensex is up 14.7%.

Gilt funds saw massive inflows of Rs 7,712 crore during the financial year ended March 2015. In comparison, these funds had witnessed an outflow of Rs 1,868 crore during the last financial year.

Retail inflation fell from 8.31% in March 2014 to a low of 4.87%, while the central bank has cut repo rates twice.

However, wealth managers do not expect there will be a repeat of this in the coming year. “Gilts rallied due to a sharp drop in inflation and a couple of rate cuts,” said K Ramanathan, founder, Spectrum Wealth Solutions. With retail inflation already down from 8.31% in March 2014 to 4.87% in April, it should stabilise. Though Ramanathan expects a 50 basis points rate cut, he expects this to happen later this year. Hence he expects gilt funds to deliver a nominal 9-10% return this year. Equities though are expected to deliver higher returns in the coming year. “Gilt funds tend to outperform equities in the short term at the start of the interest rate cut cycle,” said Vidya Bala of fundsindia.com.