Return Tracker. Gilt funds give up gains

After a somewhat lacklustre performance in 2015, gilt funds, which predominantly invest in government bonds, put up a stellar show in 2016.

Over the past one year, returns from gilt funds averaged 12 per cent, with top performing funds raking in 16-17 per cent returns. The rally in bond prices was thanks to the sharp fall in 10-year G-Sec yield.

Starting end of March 2016, the yield on G-Secs fell by about 130 basis points by the end of November 2016. Aside from the RBI cutting its policy rate, various measures taken by the central bank to improve liquidity, including open market operations, led to the fall in yields.

The Centre’s demonetisation move, which led to surplus liquidity in the system, led to another leg of fall in the month of November.

Gilt funds made hay from the rally in bond prices. Remember, yield and price of bonds have an inverse relationship.

But the party halted in December when the RBI stayed put on rates. The next jolt came in the February policy when the RBI indicated a near-zero possibility of rate cuts. The latest April policy has been no different.

Following the yo-yoing of rates, the performance of gilt funds over the last year has also changed considerably.

The top performing funds in the last one year are UTI-Gilt Advantage Fund – LTP, Invesco India Gilt Fund, JM G-Sec Fund - Regular Plan, Canara Robeco Gilt (PGS), SBI Magnum Gilt Fund - LTP – PF, SBI Magnum Gilt Fund - LTP - PF 3 yr, SBI Magnum Gilt Fund - Long term and IDFC G Sec Fund – PF. These funds have delivered 14.5 to 16.8 per cent in the last year.

The bottom performing funds during the same period are Sundaram Gilt Fund, Baroda Pioneer Gilt Fund - Plan A, DHFL Pramerica Gilt Fund, Edelweiss Govt Securities Fund, Escorts Gilt Fund, and Birla Sun Life Govt Sec - Long Term. These funds returned anywhere between 9.4 and 10.4 per cent in the last year.

Remember, government bonds do not carry a credit or default risk. But they do carry a higher interest rate risk. Longer duration bonds are more sensitive to interest rates. Hence in a falling rate environment, the fund manager increases the duration or maturity of the fund, and vice versa in case of a rising rate scenario. Between, March and November 2016, gilt funds made good gains when rates fell. But the expectation reversed after November 2016.

What has set the men apart from the boys is the proactive reduction in maturity of the fund over the past four months.

Between November 2016 and February 2017, top performing funds such as UTI - Gilt Advantage Fund – LTP cut the average maturity of the fund from 13.3 to 6.9 years. The other two top performers too followed a similar strategy - Invesco India Gilt Fund reduced its maturity from 21.1 to 3.5 years, while JM G-Sec Fund - Regular Plan brought its maturity down from 14 to 5 years.

However, for funds at the bottom of the pecking order, maintaining high maturity over the past four months has cost them dear. For instance, Sundaram Gilt Fund (9.2 to 8.4 years), Tata Gilt Mid Term Fund (7.8 to 7.3 years) and DHFL Pramerica Gilt Fund (6.61 to 6.64 years) have hardly tweaked their maturity over the past four months.

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