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Gilt fund returns, which took a knock last year, have made a comeback. Most funds in this category managed to deliver 6-7 per cent return year-to-date.
The sudden liquidity-tightening measures introduced by the RBI in July last year, which led to a sharp increase in rates, saw returns on long-term gilt funds shrink by 7-9 per cent in just three months (May-August 2013).
But gilt funds have been quick to recoup their losses since September last year, when the RBI started reversing these measures.
However, the real rally in gilt funds began in January this year, triggered by hopes of an economic recovery and stable government. Foreign portfolio investors have brought close to $13 billion into the debt market since January.
The possibility of rate cuts in the next one year or so has also been driving positive sentiment. However the yields on the 10-year G-Secs, have been hovering in the 8.7-8.8 per cent range for quite a while now. Taking the right call
The top performers year-to-date, in the medium to long term gilt fund category, have been ICICI Pru Gilt Fund Invest PF plan, Franklin India G-Sec – LTP, Franklin India G-Sec - PF Plan, Franklin India G-Sec – Composite, and Birla Sun Life Gilt Plus - PF Plan, delivering 7-7.5 per cent returns.
But these have not necessarily been the top performing funds in the last one year as they lost more during the correction. For instance, Tata Gilt Medium Term Fund, which delivered 10.6 per cent in the last one year, saw its returns shrink by just 3 per cent during May-August 2013.
L&T Gilt, which delivered 9.2 per cent in the last one year, saw its returns decline by just 2.5 per cent during that period.
This is thanks to the fund’s active management of duration. L&T Fund cut its average duration to 3.5 years in July last year. Now the fund has once again increased its duration to 6.7 years.
This will help it cash in on rising bond prices, if interest rates start to trend down over the next one or two years.
Funds that underperformed include Edelweiss Gilt Fund, Birla Sun Life Gilt Plus, and DSP BR G-Sec, that delivered 2-3 per cent return in the last one year. Most of these funds failed to cap losses as well as missed the bus during the rally.
When selecting gilt funds it is better to look at their track record over a longer period across rate cycles.
L&T Gilt Fund, IDFC G-Sec Invst Plan and Tata Gilt Medium Term Fund have been some of the funds that have been top performers over a two and four year horizon.
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