Gilt funds have delivered close to 14-16 per cent return in the last one year. Do you expect these returns to sustain over the next one or two years?
At this juncture, it is very difficult to take a call. The 10-year G-sec yield is hovering in the range of 7.5 per cent. If one were to assume a one-way decline in yields to 6.9 to 7.0 per cent, which the market was expecting till very recently, the gross returns (for a gilt fund holding it) will be around 10 per cent. The net returns after fund expenses will be much lower. However, if there is a two-way movement in yields, fund managers may be able to capture additional returns from this volatility. But even so, a repeat of last year’s performance looks difficult.
What level of rate cuts is factored in the yields right now?
The market was pricing in another 25 basis points repo rate cut in the RBI’s July policy. However, the recent sharp fall in the rupee against the dollar in the last month or so has taken away some of the expectations, and hence yields have risen by 10 to 15 bps from the 7.3 per cent level earlier.
So is there a price risk for investors who enter at this point of time?
Certainly. In May, the bond market saw a very significant rally, on the back of very aggressive rate cut expectations then. Rupee depreciation has curtailed those expectations and we have seen some retracement of yields. Should the rupee start to stabilise, and if rate cut expectations are met, then yields may decline. So investors need to be cognizant of the risk both ways. And hence we advise investors not to gauge opportunities based on historical returns. If you are not a big risk taker, allocate 50 per cent of your new investments in short and medium-term funds and balance in dynamic, income, and gilt funds.
Will the government exceed its borrowing targets this year?
Finance Minister P. Chidambaram managed to rein in fiscal deficit for 2012-13 at 4.9 per cent of gross domestic product (GDP) by cutting down planned expenditure to the tune of almost Rs 1 lakh crore. For 2013-14, he has set a target of 4.8 per cent of GDP. This means that revenues will have to go up by around 21 per cent from last year’s revised estimates. While we would like to give the benefit of the doubt to the Finance Minister, considering the current scenario, we believe that later this year, fiscal deficit pressures may start to materialise.
So, at this point of time, would you recommend corporate bond funds instead of gilt funds?
Corporate bonds do offer better accruals. To invest in them you also need to have a view on corporate bond spreads (difference between their interest rates and those on government bonds). The fundamental logic is that, as spreads on corporate bonds compress, they may offer better returns. On longer term corporate bonds, we don’t see any case for further compression of spreads. Due to external vulnerability, a large part of offshore borrowing of corporates may get shifted to the domestic market. As supply goes up, we think the spreads on corporate bonds may get wider. Thus on the longer duration side, we would rather own government bonds than corporate bonds. On the other hand, we are quite bullish on shorter end corporate bonds as the domestic liquidity situation seems to be getting better.
Between gilt funds, dynamic bond funds and Fixed Maturity Plans (FMPs), all debt funds, which would you choose?
Investors should choose between them based on risk appetite and investment horizon. A Dynamic bond typically has more flexibility to manage duration and choose between corporate and government bonds. However the fund manager’s calls become critical here. FMPs are lower duration passive products and carry no rate risk, whereas income and gilt funds take a higher interest rate risk.
No comments:
Post a Comment