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Should I use gilt funds for a horizon of three-four years?

As we are past the stage of falling interest rates, this may not be an opportune time to invest in gilt funds, says Ashutosh Gupta

If my investment horizon is three-four years, can I park a lump-sum amount in gilt funds or long-term debt funds?
- Kishore Kumar

Gilt funds make sense at the time of falling interest rates because these funds benefit the most when interest rates in the economy are falling. But on the flip side, they also suffer the most when interest rates start to rise. So, from that perspective, they are at best meant for a tactical allocation at the time of falling interest rates, but investors should also exit them when interest rates start to rise.

Now if you look at their returns over the last one- and three-year periods, they look fairly attractive because we've just been through a phase of falling interest rates last year which benefited them. That is why investors are getting attracted to them right now. But I'd suggest investors also look at their last one-month return when yields on bonds have been rising and therefore, these funds have suffered a loss.

In fact, if you compare the returns of different bond-fund categories in the last one month, gilt funds happened to be among the worst performers and some of them have lost well over 1 per cent in a one month period.

So, that's why the idea is that these funds are meant for a tactical allocation. Now the kind stage we as an economy currently are in, we are past the stage of the falling interest-rate phase. Broadly, there are no more expectations of interest rates to fall more from here on. On the contrary, depending on the macro economic factors as they unfold, the RBI may decide to start increasing the rates from sometime later in the next financial year or the one after that. So, from that perspective, this is not an opportune time to invest in gilt funds.

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