Ask ET Mutual Funds: Is it wise to continue with Kotak Gilt Investment?

I have some investments in Kotak Gilt Investment. Recently, it has fallen drastically. I don't need the money soon, but is it wise to continue with the investment or switch to any other fund? Please advise.

-- Suesh Babu

Ankita Narsey, a mutual fund advisor, responds:

Gilt funds have taken a hit in the last quarter after the Reserve Bank of India kept policy rates unchanged and shifted its monetary stance from accommodative to neutral. The RBI action indicates that it may not cut rates in the immediate future.

Bond prices move in the opposite direction of interest rates and yields. A fall in interest rate benefits long-term debt oriented funds the most.

Retruns offered by Kotak Gilt Investment are lower than its peers since the past three years. If you are comfortable to book some loss, you could exit the fund. You should also evaluate the holding time before exiting to avail indexation benefit. If debt mutual funds are held for more than three years, they qualify for long-term capital gains tax of 20 per cent with indexation benefit.

You could opt for medium and short income funds such as BSL Medium Term Fund and DSP Blackrock Income Opportunities Fund.

These funds invest predominantly in debt securities with a maturity of up to three years. They tend to have a average maturity that is longer than liquid and ultra short term funds, but shorter than pure income Funds. These funds perform when short term interest rates are high and could potentially benefit from capital gains as liquidity comes back to the market and interest rates go down.

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