I find that the ratings of the same mutual fund schemes (e.g. SBI Magnum Gilt-Long Term, UTI Gilt Advantage-Long Term) differ widely between Regular and Direct options. Why should it be so when money is invested in the same
portfolio?
Also, at this point of time, which category of funds should I choose to
take advantage of falling interest rates - Hybrid Asset Allocation,
Hybrid - Debt Oriented Conservative, Debt - Gilt Medium & Long Term or
Debt - Income? I am not very comfortable with pure equity or equity oriented funds.
- Dr. D. C. Singh
Our ratings are based on a fund's returns as well as risk profile. If the Direct plan of a fund has a much lower expense ratio than regular plan, its returns can be higher, leading to a better rating. Therefore, though the portfolio is the same, the expenses make for differing returns on the two plans. Hence the rating of the same MF can differ between regular and direct plans. Usually the rating of the direct plans will always be equal to or better than the regular plans.
Fund managers now expect RBI to cut interest rates in 2015, probably in January-March. When rates fall, bond prices rise, boosting the NAVs of debt funds. Debt funds with longer term securities in their portfolio make the most gains when rates fall.
Gilt funds- medium to long term, are the category of debt funds if you want to earn higher returns from falling interest rates. But as an investor, you must also be aware that this is the category that carries the most risk, by way of volatility in NAV. Every time interest rate expectations change, long term gilts react and impact the NAVs of these schemes. Your choice of debt funds should mainly depend on your investment horizon. If you can stay invested for 3 years or more, go in for long-term gilt funds. If your horizon is less than 1 year, short term debt funds are the best bet.
This article was originally published on January 21, 2015.
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