Comments
The RBI has been easing rates from January this year. But, surprisingly, the yields on the 10-year government bonds have not moved south. In fact, since March, yields on 10-year G-Sec have risen about 10 basis points to 7.8 per cent.
The G-Sec yield is now 60 basis points higher than the RBI’s policy repo rate at 7.25 per cent. While the RBI may pause for a while before resuming its rate cut, the wheels have been set in motion for a downward rate cycle. For investors with a long-term horizon, G-sec yields hovering close to 8 per cent offer a good entry point.
Investors can bet on gilt funds through L&T Gilt. The fund has been a consistent performer. It has delivered a compounded annual return of 10.5 per cent over the last five years, and ranks number one in its category over that time frame. The fund has beaten its category across rate cycles as well.
Good track recordThe fund’s performance has been consistent thanks to its active management of duration. Gilt funds mainly invest in long-term Government securities. While there is no credit risk in such funds, they can reap gains or suffer losses depending on the direction of interest rates. Bonds with longer durations are more sensitive to interest rates, and hence funds manage rate risk by altering the duration of the fund. L&T Gilt fund has made the best of bond rallies and also capped its losses well.
Remember the one-off liquidity tightening measures by the RBI during July 2013? The fund had reduced its duration from about five-six years to three years, thus cutting down its losses to only 2 per cent between July and September that year, even as most funds lost 4-7 per cent.
Between March 2010 and October 2011, when policy rates shot up 375 basis points, the fund managed to gain 7 per cent, better than the category. The fund also took the right calls during downward rate cycles. Between April 2012 and May 2013, the fund earned a healthy 18.2 per cent return by increasing its duration.
Through last year, the fund steadily increased its duration from about five years to eight years to cash in on the bond rally. The current duration is eight years. This will help the fund deliver healthy returns as bond yields move south. L&T Gilt has delivered 10-12 per cent returns annually in the past five years.
If you are a risk taker, this is the right time to bet on gilt funds. But remember, a bond price rally can come with sharp swings in returns.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.