Best gilt mutual funds to invest in 2023

Gilt mutual funds are likely to offer superior returns in 2023 as the RBI is likely to pause rate hikes soon, believe mutual fund advisors. Gilt funds have the potential to offer double-digit returns in a falling interest rate scenario. If you want to benefit from a likely fall in interest rates, you may take a close look at gilt mutual funds. However, be forewarned: gilt funds are risky and they are extremely sensitive to changes or likely changes in the interest rate scenario. That is why these schemes are recommended to only informed investors who are ready to take risk and have a long investment horizon.

Gilt funds are not recommended to regular debt investors because they are risky and volatile. Gilt funds suffer the most when the rates go up. The bond prices and yields move in opposite directions. When the rates go up, bond prices come down. This drag down the NAVs of schemes. The US Fed hiking interest rates again and hinting steeper hike in 2023 put long-term debt funds, including gilt funds, under pressure. The RBI was also hiking rates, but many debt fund managers believe the central bank may soon hit the pause button.

Gilt funds are debt mutual funds that invest in government-securities or G-secs. As per Sebi norms, these schemes must invest 80% of their corpus in government securities. As you see, these schemes invest in government papers or they lend to the government. Therefore, they don’t have any credit risk or they face zero defaults. However, they are extremely sensitive to interest rate changes.

These factors make investing in gilt funds extremely tricky. You should be well-informed about interest rate changes in the economy. For example, interest rates are supposed to go up in a few months. And interest rate cycles usually last for a few years. As said earlier, this will have an adverse impact on gilt schemes.

Does that mean you should not invest in these schemes? Not really. But you should invest only if you have the time to wait for the interest rate cycle to turn around. In other words, investors should be able to invest at least around five years. This will help investors to benefit from soft interest rates. For example, the interest rates may go up and the trend may last for a year or two. After that interest rate may start falling, which is beneficial for gilt funds.

These schemes offer double-digit returns when rates start falling or in anticipation of interest rate falls.

If you are interested in investing in these schemes, here are our recommended schemes. However, you should remember that these schemes are highly volatile. Only investors with high tolerance for risk and a higher investment horizon should invest in gilt funds.Best gilt funds to invest in 2023:

  • Nippon India Gilt Securities Fund
  • IDFC Government Securities Fund
  • SBI Magnum Gilt Fund
  • ICICI Prudential Gilt Fund
  • Aditya Birla Sun Life Government Securities Fund

Methodology: has employed the following parameters for shortlisting the debt mutual fund schemes.

1. Mean rolling returns: Rolled daily for the last three years.

2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.

i)When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.

ii)When H <0.5, the series is said to be mean reverting.

iii)When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series

3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.

X =Returns below zero

Y = Sum of all squares of X

Z = Y/number of days taken for computing the ratio

Downside risk = Square root of Z

4. Outperformance: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.

Asset size: For debt funds, the threshold asset size is Rs 50 crore

(Disclaimer: past performance is no guarantee for future performance.)