Should I exit mutual fund schemes that are offering negative returns?

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I need Rs 2 lakh corpus within 2 years. So I have started SIP in IDFC Gilt Fund and DSP Gilt Fund with Rs 4,000/- each. Now it has been almost 6 months that I am seeing negative returns. Is this okay? Should I move to different funds?

–Pritam Sadhu

Rushabh Desai, an Amfi-registered mutual fund distributor based out of Mumbai responds:

You have not mentioned the type of gilt funds you possess. There are two types of gilt funds, one which invests only into 10-year government securities and the other invests into government securities of different maturities based on the fund mandate and fund manager’s foresight. IDFC and DSP have funds in both of these gilt categories with average maturities in the range of 6 to 10 year.

The negative value seen in these funds was caused due to the spike in the Indian bond yields which are inversely related to the bond prices. The spike in yields affects mutual funds having higher average maturities and modified duration the most like the funds you hold. Long duration funds are best bought during falling interest rate cycles which is behind us at the moment.

Luckily gilt funds theoretically don’t face any credit risk so if you hold on for a longer period of time you shall recover your notional loss. These funds are not ideal for you as your time horizon is very less.

You should typically match your investment time horizon with the maturity profile of the fund and choose funds accordingly. For a 2 year time frame I would recommend you to venture into funds like Kotak Short Term Fund and IDFC Short Term Fund from the short duration debt category. The yields will be less but the funds will be less volatile comparatively. With 2-to-3-year AAA bond yields currently trading between 4.5% to 5.5% a monthly SIP of Rs 4,000 shall not be able to give you a corpus of Rs 2 lakhs for this you will need double your SIP amount to reach your goal.