Advisors bat for SIPs in gilts to ride out the interest rate cycle

Investors could start a one year systematic investment plan (SIP) in gilt schemes, a mutual fund product that invests in government securities, say investment advisors and money managers.

With yields on government bonds expected to peak out in the next year or so, a SIP — a regular investment plan akin to recurring deposits of banks — would help investors tide over the volatility in these bonds and build a corpus that could benefit from the subsequent easing of yields.

Bond yields and prices move in opposite directions: when yields rise, prices fall and vice versa. Investors in gilt funds look to bet on fall in bond prices or falling yields. Currently, yields are rising on expectations the RBI would tighten interest rates.


“Invest in a gilt fund over the next one year and stay through the volatility as interest rates are likely to be volatile. After that stay put for the entire rate cycle to reap the returns,” said Rajeev Radhakrishnan, head of fixed income, SBI Mutual Fund.

A SIP will help them average their investments as yields peak out over the next one year and earn annualised double-digit returns over the next interest rate cycle or three years.

Once this investment is done, through SIP for one year, they can just hold on to their investments for the next 2-3 years to get maximum benefits of the interest rate cycle and tax benefits through indexation. “By staying put over the interest rate cycle investors can earn interest income as well as stand a chance to earn a capital appreciation,” said Rupesh Bhansali, Head (Distribution), GEPL Capital.

While it is difficult to predict when interest rates would peak out in a rising interest rate environment, Bhansali believes interest rates could peak out over the next six months and on the higher end the 10-year benchmark could move up by another 25-50 basis points from the current levels of 8%.

Fund managers in gilt funds have the ability to actively manage duration. As interest rates decline, they can raise duration and many a time could take it to even as high as 15-20 years.

If interest rates were to decline by 200 basis points over the next 3-4 years, and the portfolio has a duration of 10 years, investors could stand to earn a capital appreciaton of 2.5-3% every year. Adding the interest income of 8% every year and a capital appreciation of 2.5% every year, investors stand to earn an annualised 10.5-11% every year on their investment.

Financial planners say that gilt funds score over credit funds or corporate bonds as there is no credit risk and capital protection is more or less guaranteed as they invest into government securities. Also, such funds score as retail investors find it difficult to access government securities on their own.

Top Performers

Fund name	1-year return (%)	3-year return (%)	AUM (Rs Crore)
HDFC Gilt	0.85	6.26	1,280
SBI Magnum Gilt	0.23	6.81	1,690
UTI Gilt	1.34	7.11	461
Reliance Gilt Securities	1.78	7.46	867
ICICI Prudential Gilt	2.56	7.49	1,080

As on October 12, 2018; Returns annualised. Source: Value Research