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Please advise some alternatives to gilt funds

Consider more conservative options like accrual funds with top ratings in the underlying, says Dhirendra Kumar

Currently, I have approximately 50 per cent of my investment in gilt funds. However, I do not want any erosion in my capital. So, please advise some debt schemes with a moderate risk-tolerance level that can be better investment options?
- Tanvi Sah

Gilt funds (which invest in government securities) have been the accidental beneficiary of recent successive rate cuts. So, you have been lucky if a substantial part of your investments is in these funds. But when a reversal happens, i.e. when interest rates go up, gilt funds will decline in value. And their decline is reflected almost instantaneously. This is because in India, we have a highly active market for government securities, as all banks have to invest in them mandatorily or statutorily. So, depending on the interest-rate outlook, it is immediately reflected.

While there is still a possibility of upside in these funds, methodically, I think you really need to transfer your money from here to more conservative options like accrual funds with top ratings in the underlying. I feel that if you are going to hold these securities through a full market cycle, the interim declines won't matter. But I think one needs to be very careful with gilt funds right now because there could be a landmine there. So, you can look at those options that are relatively safe and more stable.

The starting point of your debt fund selection should not be based on the return rather than the level of risk. Remember, risks in debt funds will visit you once in a while and it could be quite devastating. So, be careful while selecting debt funds.

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