Gilt funds making a comeback

COIMBATORE: Gilt funds, which lost their lustre due to hardening yields on government bonds, are slowly moving up the performance charts on the back of an increase in bond prices in recent months. Bond yields and prices are inversely related and an increase in bond prices means better returns for investors of gilt funds.
Medium and long term gilt funds, which invest primarily in government securities (G-Secs), have given 2.3% returns in three months (till June 7), the best in the debt category.They moved up by nearly 0.7% in one month, just below sectoral equity funds and gold exchange-traded funds.
The yield on the benchmark 10-year government bond softened to 7.52%, a 28 basis points (bps) decline, in May. The relatively benign monetary policy came as a relief to the bond market with G-Secs rallying 38 bps in the past three months. The yield on the 10-year government bond, which touched 7.9% in Februaryend, softened considerably in March and May. Industry officials expect bond yields to remain in the 7.5%-7.7% band.
The recent rally (in bond prices) is due to the higher than expected collections from 3G (auctions) and as a result the possibility of lesser government borrowing for the fiscal (year), says Lakshmi Iyer, head, fixed income and products, Kotak Mahindra MF. There is risk aversion across the globe because of the troubles in Eurozone and money is moving into treasury (bills) and gold.
Gilts are being looked at as safe haven investments due to the global uncertainty, says Chaitanya Pandey, head, fixed income, ICICI Prudential MF. The higher-than-budgeted accrual from 3G auction proceeds would reduce the issuance burden on markets over a period of time, market observers said.