Exceptional Returns from GILT FUNDS

POSTED BY manish ON December 24, 2008 COMMENTS (2)

During the last 5-6 months GILT funds have given returns like Equity funds … Something around 20-40% in last 5-6 months … And they are almost safe on downside … Lets see more on this

Read : 5 mistakes of my first trade

What are GILT Funds ?

A mutual fund that invests in several different types of medium and long-term government securities in addition to top quality corporate debt.

To have a look at different GILT Funds see :
http://www.moneycontrol.com/india/mutualfunds/gainerloser/17/15/snapshot/dlong/ab

Risks factors

Gilt funds have different kind of risks associated with it .. Once of them is interest rate risk … There returns are inversely proportional to the interest
rates and the reason for the exploding returns given by most of these
GILT funds or other Debt funds are the result of “interest risk drop in
last 6 months because of the measures taken by RBI” .

However, there are some negatives too to these funds. Bond yields carry
a higher credit risk than G-Secs and in bad times ratings can go for a
toss. Some retail investors don’t understand ratings and are also not
aware of which corporate debt these investments are made in to.

Read about “Why you need Contingency Funds”

In the link http://www.moneycontrol.com/india/mutualfunds/gainerloser/18/03/snapshot/op1/ab/option/dlong/sort/yr1
, If you see the 6 months returns and 1 year returns , they are 41.2%
and 41.8% , Think about what was the return during the 6 months period
before 6 months (Dec 07 – May 08) .. The last 6 months have been
exceptional for our Economy because of drastic decrease in interest
rates in short period of time . This happens rarely .

To get a good idea of actual performance of these funds , you should see
long term returns like 5 yrs returns or Since Inception returns .

Now if you see http://www.moneycontrol.com/india/mutualfunds/gainerloser/18/09/snapshot/op1/an/option/dlong/sort/yr1for annualized returns , No fund has crossed 12% returns CAGR , and most
of the top funds are in range of 7-8% Except the out performers with 10.3
and 12.4% .

http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1921 Shows the snap shot of a fund from the list .. you can clearly see that
the risk Grade is HIGH for this fund , because of the risk associated
with interest rates . (try to click on Portfolio part and see risk
return chart) .

The accepted return from these funds are in range of 7-10% , and they
are better for Liquidity and Tax benefit parameters (just 10% for GROWTH
and 14% for DIVIDEND option) .

8 important ratios to look at before buying shares for long term

What you should do now ? Should you invest in Them ?

Don’t get fooled by the past returns for these Funds , because now there
is no charm left in these funds now . They were excellent funds before 6
months and those who anticipated the interest rates drop made most of it
. So next time where you anticipate there is going to be fall in
interest rates , then you can consider these funds for your DEBT part of
portfolio … These are still good funds if you don’t believe in Equity
investment in these troubled times, but from my side “Equity Investments
are best as of now ” considering your time frame is 4+ years .

Summary

GILT funds are mainly DEBT products , the normal long term returns expected should not be more than 8-10% on average … But still short term opportunities exists when drop in interest rates are expected

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2 replies on this article “Exceptional Returns from GILT FUNDS”

  1. Manish Chauhan says:

    Saurabh

    Thanks for sharing the information ..

    Manish

  2. Saurabh says:

    I have come across some illustrations of Tax efficiency of Gilt funds. While they clearly highlight the benefits of dividends (taxed around 14%), not enough is said about the capital gains. The long term capital gains tax is 10% without indexation (20% with indexation) and the short term capital gains are taxed at your applicable slab rate (33% for highest).

    Gilt funds performance would largely be an outcome of the interest rate movement. Only astute investors would be able to take calls on interest rate movements in the long term (over a year). Would a good old FD then be a better bet now, than a Gilt Fund for the short term (less than a year)?

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