Mutual Funds

Gilt funds get back their mojo

Radhika Merwin | Updated on January 18, 2018 Published on July 31, 2016

The rally in bond prices helped them post decent gains

After a lacklustre show earlier, gilt funds have delivered decent returns in the last one year, thanks to the recent fall in yields of government securities. On an average, gilt funds have delivered about 11 per cent returns in the past year.

The yield on G-Secs has fallen by about 60 basis points in the last one year after remaining flat prior to that.

A cut in the key policy repo rate by 25 basis points this year as well as various measures taken by the RBI to improve liquidity, including open market operations, have aided the fall in G-Sec yields.

Gilt funds that primarily invest in these securities have gained from the rally in bond prices. Remember, yield and price of bonds have an inverse relationship.

The top performing funds in the last one year include ICICI Pru Gilt Fund - Invest - PF Option, ICICI Pru Long Term Gilt Fund, HDFC Gilt Fund Long Term Plan, ICICI Pru Constant Maturity Gilt Fund-Reg, Birla Sun Life Gilt Plus - PF Plan, Indiabulls Gilt Fund, Franklin India G-Sec Fund – LTP and L&T Gilt Fund. These funds have delivered 12-13 per cent in the past year.

The bottom performing funds in the last one year include Sundaram Gilt Fund, IDBI Gilt Fund, UTI Gilt Advantage and Tata Gilt Securities Fund - Regular and IDFC G Sec Fund - Invst Plan. However, these funds too have delivered a decent 8-10 per cent.

Factors that count

So what sets a few gilt funds apart from the rest in terms of performance?

Long-term gilt funds primarily invest in government bonds. While these bonds do not carry a credit or default risk, they carry a higher interest rate risk. Longer duration bonds are more sensitive to interest rates.

If the interest rates move up, bond prices fall. This is because investors flock to newer bonds that offer higher rates. This reduces the attractiveness of older bonds and hence their prices decline.

The reverse holds true under a falling rate scenario; bond prices move up. Thus rates and bond prices have an inverse relationship. Hence the fund manager will increase duration to cash in on the rally in bonds in a falling rate scenario.

In a rising rate environment, the fund manager will reduce the duration of the fund, to cap losses.

The top performing funds such as ICICI Pru Gilt, HDFC Gilt, Birla Sun Life Gilt Plus and Franklin India G-Sec have more or less kept their duration high at 8-9 years, betting on rates to move lower.

In contrast, funds such as Sundaram Gilt and IDFC G Sec Fund have been trimming their duration over the past year. This led to lower returns.

However, while investing in gilt funds, it is better to look at the long-term performance of the fund across rate cycles. Expense ratios of gilt funds also makes a notable difference to returns.

UTI Gilt Advantage, IDFC G-Sec, HDFC Gilt and ICICI Pru Gilt are some funds that have an expense ratio of 0.7 to 0.8 per cent. Sundaram Gilt, L&T Gilt, IDBI Gilt and Franklin G-Sec are some funds that have a high expense ratio of 1.8-2.4 per cent.

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