Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Should you invest in gilt funds now? - Outside View by PersonalFN
  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Should you invest in gilt funds now?
Apr 4, 2013

As many of you may be aware, yesterday the Reserve Bank of India (RBI) reduced the repo rate by 25 basis points (bps) in line with what the markets expected. With economic growth rate depicting a descending move and WPI inflation along with non-food manufacturing inflation providing some relief, the central bank attempted to address to growth risk to some extent.

How policy rates were reduced in FY12-13
  Magnitude of reduction
April 2012 50 bps
January 2013 25 bps
March 2013 25 bps
Total 100 bps

If we observe the table above, in the fiscal year 2012-13 the RBI has reduced policy rates thrice, making a total reduction of 100 bps thus far. So given a fall in policy rates, many of you may be wondering whether gilt funds is best investment option in present times.

Well, if we take a closer look at what has been enunciated by the RBI in the last two guidance from respective monetary policies (i.e. 3rd quarter review of Monetary Policy 2012-13 (held on January 29, 2013) and yesterday's 4th quarter mid-review of Monetary Policy 2012-13), one will observe that on inflation, RBI's view is alike; that it would remain range-bound around the current levels going into 2013-14 in view of sectoral demand-supply imbalances, the on-going corrections in administered prices and their second-round effects. Moreover with elevated food prices, including pressures stemming from Minimum Support Price (MSP) increases, the wedge between wholesale and retail inflation is projected to have adverse implications for inflation expectations. The central bank has also highlighted that risk emanating from Current Account Deficit (CAD) remains significant. And thus assessing these aspects, it has now said that although the policy stance emphasizes addressing the growth risks, the headroom for further monetary easing remains quite limited.

So, there is a change in guidance. And now to address to growth risk the RBI has lobbed the ball in Government's court by saying that the Government has to play a critical role in accelerating investments for which it has to:

Thus the onus of reviving investment sentiments in the country has been put on the Government, with the RBI making it clear that a competitive interest rate is necessary for this, but not sufficient.

Hence we are of the view that, headroom for further monetary easing remains quite limited and one may not see much gain in gilt funds. The Government borrowing worth Rs 3.49 lakh crore during April 2013 to September 2013, would lead to excessive supply of Government paper, thereby limit the fall in yield and consequentially limiting the gains. Moreover, how the country would manage the twin deficit problem and the political drama, would also decide the course of yields in this segment. At present while taking exposure to debt mutual fund schemes and fixed income instruments, one should clearly know their investment time horizon, and invest appropriately in respective category of debt mutual fund schemes, but stay away from gilt funds, and refrain from speculating.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Should you invest in gilt funds now?". Click here!


More Views on News

The Right Financial Advisor Is Around the Corner (Outside View)

Mar 10, 2016

An opportunity to find an impeccably trustworthy and competent financial guardian is in the offing.

Why financial planning should be dull and boring (Mutual Fund Corner)

Feb 29, 2016

Most financial planners come out as whiz kids who throw around financial jargon. But financial planning can be actually easy, provided one follows a disciplined approach.

More Views on News

Most Popular

Here's What You Should Do in this Market Crash(The 5 Minute Wrapup)

Feb 6, 2018

The market correction has provided a golden opportunity to buy five high-quality safe stocks.

As the Market Corrects... It's Time to Buy More(Smart Contrarian)

Feb 5, 2018

The recent sell off in the stock market offers buying opportunity in some quality small caps.

The Era of Easy Money is Coming to an End. What Happens Now?(Vivek Kaul's Diary)

Feb 9, 2018

The easy money policy of the Federal Reserve of the United States, which drove up stock markets all over the world, is ending, with the Federal Reserve looking to shrink its balance sheet.

When Small is Not Always Beautiful(Chart Of The Day)

Feb 6, 2018

Big companies enjoying tax deductions and exemptions have an edge over the small companies.

What Should Mutual Fund Investors Do After LTCG Tax Norms(Outside View)

Feb 6, 2018

PersonalFN explain what investors should after LTCG tax norms.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms