Portfolio

Trick to making gains from gilt funds? Stay invested longer

Dhuraivel Gunasekaran BL Research Bureau | Updated on June 07, 2020

Holding units for 10 years or more helps duck volatility

Gilt mutual funds, which have seen a spurt in inflows over the past few months, are in the limelight again.

While these funds carry very low credit risk, they bear an interest-rate risk that makes their returns highly volatile in shorter time periods. However, a BusinessLine analysis shows that investors who stay with gilt fund investments longer — for 10 years or more — can overcome some of the volatility.

Sharp surge

Data compiled from the AMFI (Association of Mutual Funds in India) show that over the two months ended May 31, 2020, the assets under management (AUM) in the gilt funds category (including gilt funds and 10-year constant maturity funds) surged a sharp 70 per cent to ₹17,498 crore.

Investors who had turned risk-averse towards other debt fund categories after the Franklin Templeton debacle seem to be flocking to gilt funds.

Expectation of a further fall in sovereign yields also attracted more investors towards gilt funds.

Gilt funds are mutual fund schemes investing predominantly in Central and State government securities. These are almost default-free as they invest in bonds with sovereign guarantee.

However, they are exposed to interest-rate risk as fund managers of gilt funds actively churn the duration of the funds based on the interest-rate movement in the market.

 

High credit quality

Gilt funds have therefore predominantly been the short-term playing field for savvy investors such as corporates and high networth individuals (HNIs) who try to capitalise on the interest rate gyrations.

It would be difficult for retail investors to track the interest rate movement and time the entry and exit in gilt funds. However, retail investors can manage the volatility by staying for a longer period, which allows them to benefit from several cycles of rising and falling interest rates.

Holding period

A BusinessLine analysis of the performance of gilt funds on a rolling return basis in various time frames reveals that the volatility in returns is the highest in the one-year period. As the holding period increases, to say, three, five or 10 years, the returns turn smoother.

Gilt fund returns are, however, more volatile when compared with other debt fund categories such as long duration, short duration and liquid funds. But the other funds carry higher credit risk. Investors with a medium to long risk profile who want to avoid credit risk can consider investing in gilt funds for a long-term debt portfolio.

Keep in mind that these can form only 10-20 per cent of your long-term portfolio. For the best gilt funds picks, please refer to the BusinessLine Portfolio Star Track Mutual Fund Ratings.

Published on June 07, 2020

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