Gilt funds make a comeback with over 8% returns in 3 monthsRemember how some months ago experts told you how gilt funds are not a great investment idea right now? Well, turns out those experts are ‘guilty’ of giving wrong advice. With G-Sec yields at over 8.1% in early October, many experts thought it could get worse. But, financial markets have a habit of doing the unexpected. The 10-year government bond yield is at 7.4% now, resulting in higher returns for Gilt funds. Gilt funds, which only invest in government securities, have gained up to 4.7% in last one month and up to 8.65% in last three months. Read on to know more.

What are Gilt Funds?

Gilt mutual funds are a type of open-ended debt/fixed income scheme. They provide returns to the investors generated through investments in government securities issued by the Central Government and/or State Government(s). Investment in Central and/or State Government securities are considered to be free of credit risk. So, the aim of the gilt fund portfolios is to make capital gains by actively managing interest rate risk.

Capital appreciation or capital loss occurs due to movements in bond prices which are inversely related to interest rates. For example, if interest rates rise, bond prices would fall. If interest rates drop, bond prices would rise. Generally, longer maturity bonds are more sensitive to movements in interest rates vis-à-vis shorter maturity bonds. Gilt funds typically tend to hold medium to longer maturity papers. So, a larger proportion of their return is generated from capital appreciation or capital loss. Do remember that many gilt-focussed funds don’t have exit loads, which boosts liquidity factor.

However, gilt funds are quite volatile. They are not ideal for somebody who cannot stomach volatility. Even many sophisticated individual investors and corporates could not make peace with short-term losses in gilt funds sometime back. Between April and October, pure gilt funds saw total outflows of over Rs 3,300 crore.

Take a look at how G-Sec yields have moved in the last 12 months.

G-Sec yield

Gilt funds rally 

Gilt funds earlier saw large losses on account of the G-Sec yield moving up. In January, February, April, and August this year, many gilt funds with 10-year constant duration, long duration funds and plain-vanilla gilt funds, saw steep losses of about 1% in each month. This led to investor outflows and dejection.

However, lately, the G-Sec yield has moved down due to various reasons like expectations of a nil hike in interest rates. Now, the G-Sec yield has corrected, resulting in higher prices of underlying bonds. There is also expectations that the RBI may in the future consider cutting rates if the upside inflation risks do not materialise.

Fund manager skill and tactical plays in terms of active trading have helped many gilt funds to show handsome gains in the last one to three months. For instance, in November, Reliance Nivesh Lakshya Fund showed 4.4% gain. ICICI Prudential Long Term Bond Fund showed 1.96% gain in the same month. IDFC Government Securities Fund – Constant Maturity Plan rose by 2.71%, Franklin India Government Securities Fund gained 2.7%, and SBI ETF – 10 Year Gilt appreciated by 2.23% among the best performers. In October, gilt funds with 10-year constant duration had gained 1.7-2.17%.

Take a look at 1-month, 3-month, 6-month and Year to Date performance of selected funds with high gilt exposure:

Fund Name
1-Month 3-Month 6-Month YTD
Return % Return % Return % Return %
Reliance Nivesh Lakshya Fund 4.69 8.65
IDFC Government Securities Fund – Constant Maturity Plan 3.34 7.56 8.69 10.29
SBI ETF 10 Year Gilt 3.05 6.15 7.23 5.17
SBI Magnum Constant Maturity Fund 3 6.32 7.17 9.07
Franklin India Government Securities Fund 3 5.86 5.99 3.04
DSP 10Y G-Sec Fund 2.93 5.89 6.89 5.1
LIC MF G-Sec Long Term Exchange Traded Fund 2.91 6.75 7.58 6.35
Reliance ETF Long Term Gilt 2.88 6.74 7.65 6.46
ICICI Prudential Constant Maturity Gilt Fund 2.83 6.38 7.59 8.42
Aditya Birla Sun Life Government Securities Fund 2.8 4.84 6.42 6.07

 

Author
Rahul Sharma

Rahul Sharma is a contributing writer with RupeeIQ. He can be contacted on contact@rupeeiq.com