The net asset value (NAV) of gilt funds, which took a beating due to rise in gilt yields, are expected to fall further in the next six months amid heavy supply of gilts every week to meet the government’s borrowing in FY11.
If we take the returns from the start of this fiscal, gilt funds have given the lowest returns among its peers.
The average returns of medium and long-term gilt funds are 2.83% and that of short-term gilt funds are 2.68%, as per data on the Value Research (a mutual funds research firm) website.
Gilt funds invest majority of their corpus in gilts. As gilt yields rose, the NAVs started falling. Gilt prices were impacted due to the record government borrowings worth Rs 4.51 lakh crore in FY10 and rising inflationary pressures.
In order to meet the government’s borrowing target, the Reserve Bank of India (RBI) had resorted to front-loading, wherein for the first few months of the fiscal there were gilt auctions worth Rs 12,000 crore every week.
During the second half of the fiscal, inflation gained momentum and this resulted in further fall in gilt prices.
The yield on the 10-year gilt closed at 8% on Monday, whereas on April 1, 2009 it had closed at 7.00%. “Yields may rise further and this will bring down the gilt fund returns even more in the next few months,” said the head of fixed income at a fund house. Fund managers are expecting RBI to resort to front-loading even in FY11. The government has announced a gross borrowing of Rs 4.57 lakh crore for FY11. Net borrowing is pegged at Rs 3.45 lakh crore as against Rs 3.98 lakh crore borrowed in FY10. “The yield on the 10-year gilt may touch 8.5% by September,” said K Ramkumar, head of fixed income at Sundaram BNP Paribas Mutual Fund.
But post-September, NAV of gilt funds may rise.
“Returns will pick up post-September when inflation slows down and majority of the government borrowing is over,” said Murthy Nagarajan, head of fixed income, Tata Mutual Fund. Fund managers expect average returns to be in the range of 7-8% by December.
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