MF Query Board

MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved.

My gilt fund investments of Rs10 lakhs were giving me positive returns till a few weeks ago. However, all of a sudden, the returns turned negative. Does this mean that the interest rate cycle is reversing and we need to get out of such funds?
- Rafiq Mohammad

To begin with, it is important to understand the purpose of your investment. If your investment purpose is long-term, then just hold on to your investment and review that fund periodically. Apart from that, if you are actively managing your debt portfolio, then keep reading further for insights. As is known in fixed income, when yields fall, bond prices rise and in turn the returns on your bond funds and vice versa. Therefore, though the gilt funds are free from any sort of credit risk, it is sensitive to interest rate risk. Further, mutual funds follow two kinds of strategies, namely, accrual and duration.

Funds following the accrual strategy would help you decrease your interest rate risk. Therefore, when the yields are rising it is prudent to shift to accrual funds. And such funds are able to reduce the interest rate sensitivity as they hold the papers until maturity and their main source of income is coupon payments. Gilt funds do not follow the accrual strategy. In fact, they are pure duration funds that invest predominantly in long-term government securities. Hence, they are quite prone to interest rate sensitivity. Now the question is when to invest in gilt funds. As said earlier, if your investment horizon is long-term then you may consider investing in gilt funds.

Further, if you are actively managing your portfolio then investing in gilt funds when the yields are high is a prudent strategy. This is because when the yields start falling, these funds benefit from rise in bond prices.



You may have witnessed that gilt funds have performed quite well in the past one or two years. This is because the Reserve Bank of India (RBI) had cut key rates by around 115 basis points (100 basis points = 1 per cent) and as a result bond yields started falling from September 2018. The image above shows 10-year benchmark bond yields. We believe that there are few chances that the RBI would further cut the key rates despite its accommodative stance. Hence, we are of the opinion that bond markets would be volatile and it is better to hold short duration funds with average maturity of not more than three years.

Post the Securities and Exchange Board of India’s change in definition of multi-cap funds, what should investors do?
-Hardik Panchal

First and foremost, as of now it is better to do nothing with your multi-cap funds. Clarity is yet to emerge on how the issue will shape up in the coming days. If any change needs to be carried out in the proposed way, it will be a huge change and multi-cap funds would need to realign their portfolios. There are some big multi-cap funds that have virtually no investments in the small-cap space and if they were to invest 25 per cent each in mid-caps and small-caps, then it will impact the fundamental dynamics of the funds. Further, we believe that the small-cap universe does not have that much liquidity available to absorb such a magnitude of investment in a short period of time. Hence, there are lot more chances that many funds will actually shift themselves somewhere else.

They might change themselves to focused funds or large-cap and mid-cap funds or something else in order to comply with the new rules without impacting much of the current structure of the fund. On the other hand, for those funds that opt to comply with these new rules, it would be difficult to consider them as multi-cap funds. This is because if we look the composition of S & P BSE 500 or Nifty 500, which a majority of the multi-cap funds are benchmarked against, the top 100 companies (large-caps) in terms of market capitalization form about 73 per cent while around 14-15 per cent is contributed by mid-caps and the remaining 11-12 per cent by small-caps.

That said, if you are an investor of multi-cap funds, it is best as of now to do nothing. Asset management companies (AMCs) still have time till January 2021 to figure out what they should be doing. Definitely, the funds would notify their move to investors so that they can take timely decisions. Do check the cover story of this issue to know more about this topic. Further, we would keep you posted of any new developments in this space. Therefore, keep updating yourself with the mutual fund section on our website. We believe that multi-cap funds were once truly diversified equity funds and as a novice investor it is better to keep things simple. But now with this new change, multi-cap as a category would not be as suited for conservative to moderate investors.

 

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