Aided by a few rate cuts, gilt funds have outperformed the Sensex over periods of three months, six months and one year.
Gilt funds invest in medium and Long Term Government Bonds and fetch maximum returns in a bond rally when prices of underlying assets rise. High Net Worth Individuals (HNIs) who bought gilt funds have been well rewarded.
With oil and commodity prices cooling off, the rupee stable relative to other currencies, and the RBI cutting repo rates by 50 basis points in two tranches, gilt funds have done well.
Over the past six months, gilt funds have returned an average of 5.73%, while the Sensex lost 1.7%. For a one-year period, gilt funds are up 15.2%, while the Sensex is up 14.7%.
Gilt funds saw massive inflows of ` . 7,712 crore during the financial year ended March 2015.
In comparison, these funds had witnessed an outflow of ` . 1,868 crore during the last financial year.
Retail inflation fell from 8.31% in March 2014 to a low of 4.87%, while the central bank has cut repo rates twice.
However, wealth managers do not expect there will be a repeat of this in the coming year. Gilts rallied due to a sharp drop in inflation and a couple of rate cuts. With retail inflation already down from 8.31% in March 2014 to 4.87% in April, it should stabilise.
Though a 50 basis points rate cut, he expects this to happen later this year.
Hence he expects gilt funds to deliver a nominal 9-10% return this year.
Equities though are expected to deliver higher returns in the coming year.
Gilt funds tend to outperform equities in the short term at the start of the interest rate cut cycle. However, over a three to five-year period, equities have outperformed gilt funds.
Compared to a 5-6% earnings growth this financial year, earnings growth will double to 3-15% next year.
Given the correction in the markets, he feels equity valuations are attractive with a 1-2 year perspective and feels they could deliver 18-20% over the next one year.
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