Be gilt-free, start an SIP into equity

It’s time to stop investing in gilt funds

Quite in line with expectations, the Monetary Policy Committee held the policy repo rate stable citing the global environment too risky to warrant any further easing. The Committee also emphasized on the need for bringing headline inflation closer to target range on a sustainable basis.

While maintaining status quo on the policy interest rate – the rate through which liquidity is infused, the RBI has increased the reverse repo rate to drain the system of excess liquidity.

The committee also acknowledged the fact that the southwest monsoon this year may see an el nino effect which would propel inflation higher mid-FY’18 onwards. RBI’s baseline projection suggests that inflation could rise to 5% towards the end of the fiscal year despite being conservative on crude price estimates.

Given the current dynamics of the economy, we expect the yields to harden further with no evident sign of softening in the future. It is advisable to reduce exposure to gilt funds.

What to do instead?

Invest in large-cap oriented equity funds through a Systematic Investment Plan

Equity markets are euphoric and seem to be playing well on India’s growth story. While valuations may appear slightly steep, investor sentiments and market cycle point towards a further uptrend.
Domestic investors have displayed solidarity during the previous few months where shortfalls by foreign investors due to uncertainty were matched by domestic inflows. At the moment, markets are witnessing a return of foreign funds which is pushing the indices further upwards.

Though there may be temporary hiccups due to the disturbance by GST implementation, the markets are expected to maintain an upward trajectory in the year to come. It is advisable for investors to continue investing into large-cap oriented equity funds through SIPs as corporate as corporate earnings catch up.

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