How gilt funds lost their sheen

Not very long ago, gilt funds were the top performing fund category, with interest rates steadily falling and bond prices gaining.

But recent efforts by the RBI to salvage the rupee have hit these funds hard. Gilt fund investors were in for a rude jolt on July 16, after the benchmark 10-year G-sec yields jumped by 50 basis points, the biggest rise since January 2009.

This followed the central bank’s decision to hike the marginal standing facility (MSF) and bank rates by almost 200 basis points each.

A meaningful portion of the gains made by gilt funds in the last one year were eroded by this move. Even as many market participants believed this to be a one-off event, the volatility does not seem to be reducing. .

The benchmark 10-year G-sec yield has risen by nearly 100 basis points in the last one month and bond prices slid by as much as 6 per cent. As a result, gilt funds, on an average, lost over 3 per cent in the last 10 days to July 23.

We took stock of gilt fund returns to gauge who survived the rout best.

Rising yields

ING Gilt topped the losers’ list shedding 4.9 per cent in the last 10 days. Kotak Gilt, Templeton India G-sec and Edelweiss Gilt also shed 4.6 to 4.8 per cent. Higher exposure to long-term securities led to this underperformance.

For instance, ING Gilt Fund’s portfolio had high average maturity and modified duration, compared with other funds in the same category. Its average maturity was at 13.7 years, compared with the category average of 6.8 years.

This led to the sharp fall in the fund’s returns. Also, the fund’s modified duration, which measures the sensitivity of the fund returns to interest rate changes, was significantly higher (7.8 years) than the category average (4.3 years).

Similarly, in the case of Kotak Gilt Fund, higher average maturity of its portfolio (10.8 years) impacted the fund performance. Its modified duration was at 5.8 years.

But not all gilt funds suffered equal reverses in this period. Some funds managed to buck the trend, even posting marginal gains.

For instance, Sundaram Gilt topped the winners’ list gaining 0.3 per cent in the last 10 days. Other gainers include smaller funds, such as Escorts Gilt, Taurus Gilt and Sahara Gilt. With total assets of less than Rs 5 crore, the sheer size of these funds in addition to a lower average maturity and modified duration may have helped these funds fare better. On a one-year basis too, Sundaram Gilt Fund now tops the winners’ list, raking in 18.2 per cent gain.

Containing falls

Despite the recent fall, funds such as IDFC G-Sec, L&T Gilt and SBI Magnum Gilt made healthy gains on a one-year basis. However, funds such as Edelweiss Gilt, LIC Nomura G-Sec, Templeton India G-Sec, Birla Sun Life Gilt Plus and Axis Constant Maturity Fund – 10 years, figure in the list of laggards.

Obviously, a week or ten days is a rather short period time to gauge the performance of a fund.

However, episodes such as this occur rarely but they highlight that credit risks are not the only risks that debt fund investors need to budget for. The fund manager’s ability to manage rate risk may be equally important to reduce volatility in returns.

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