Here are the Best GILT Funds for 2017:
GILT Funds are open-ended debt funds which invest in government securities. These securities are also known as G-Sec. Apart from G-Secs, these funds may invest in state development loans, treasury bills and central government loans.
The primary aim of GILT Funds is to earn interest income by holding debt instruments until maturity. These funds also look for capital appreciation as a result of an increase in the price of the underlying instruments.
There can be short-term GILT funds. But the majority of investors go for the medium and long-term GILT funds.
The portfolio composition of GILT Funds keeps changing with the external environment. The fund manager may increase/decrease the proportion of existing securities. He may add new securities to the portfolio to the advantage of interest rate regime.
GILT Funds are known to carry the least credit risks of all the funds. Each of the underlying securities carries a sovereign credit rating. It is an assurance that the fund wouldn’t default in repayment of the principal invested upon maturity.
In this way, GILT Funds are less risky than equity funds. But at the same time, these generate lesser returns than equity funds. Hence, these are better suited for the risk-averse category of investors.
Duration and Average Maturity in GILT Funds
While investing in GILT funds, it becomes necessary to ascertain the average maturity and duration of the fund. Average maturity relates to the minimum time taken for security to mature. The higher the average maturity, the longer your funds stay invested in the fund.
Duration relates to the minimum time taken for the fund to generate cash flows. You will find most of the GILT Funds following the modified duration concept. It considers the reinvestment risk present in the funds. It means that the interest rates are bound to change at the time of reinvestment.
Hence, funds having shorter duration will generate cash flows soon after investment takes place. Conversely, longer duration funds will have longer gaps between investment and generation of cash flows.
The average maturity of long-term GILT funds tends to be at least 3 years. The highest average maturity can be as long as 12 years. It means that you need to invest in GILT Funds only if you have an investment horizon of at least 3-5 years.
GILT Funds & Interest Rate Risk
Interest Rates and GILT Funds are archrivals. There exists an inverse relationship between GILT Fund returns and interest rates. An increase/decrease in the interest rates causes the fund NAV to fall/rise. It results in fluctuations in fund returns.
In fact, this extreme volatility of GILT Funds returns makes them the riskiest in debt fund category. The impact is so profound that it may drive the returns to negative in the short run. A naïve investor should not venture into GILT Funds without a robust strategy.
If you are interested in GILT Funds, then you need to invest opportunistically. Also, don’t be headstrong on staying invested for long-term. Having a strategy would help you to avoid any precarious situation.
The best time to dive into GILT Funds investment is during falling interest rate regime. Be vigilant of the day-to-day interest rate movements. The moment you sense a hawkish rate scenario, move out of the investment.
Before investing in any of the GILT Funds, you need to analyse them. Use quantitative and qualitative parameters to select the most appropriate funds.
Look for a fund which gives you consistent and stable returns year-after-year. A fund having lesser volatility will be consistent.
Volatility can be ascertained using Standard Deviation & Beta. Standard Deviation indicates how much the fund returns deviate from its average returns. Choose a fund with a low standard deviation. It will ensure less erosion of NAV during interest rate changes.
Beta indicates how much fund returns are sensitive to index movements. In India, the benchmark for GILT Funds is ICICI Securities LiBEX. A fund with low beta will lose less upon a fall in benchmark returns. Choose a fund with a low beta in case you are a risk-averse investor.
Expense ratio too influences your fund returns. Go for funds having the lowest expense ratio. It will ensure higher fund returns. Risk-adjusted returns, too, become a critical parameter for fund selection. Select funds with a higher Sharpe & Sortino ratio to receive higher fund returns.
Following are some of the season’s top GILT funds shortlisted by the above parameters:
GILT Funds vs. Other Debt Funds
There are other debt fund categories which invest in GILT Funds. You will find them in the portfolio of Dynamic Bond Funds and Income Funds. In fact, the average maturity of these funds is around 3 years; same as GILT Funds.
However, the volatility of returns is much lower compared to GILT Funds.
The volatile behaviour of GILT Fund returns makes one think whether the risk is worth assuming or not. A comparison of GILT Funds with other debt funds provides a solution.
The table below shows the behaviour of GILT Fund returns vis-à-vis other debt funds.
GILT Funds have delivered extremely high returns in the 1year period compared to other funds. But as the time passes, there’s significant fall in the fund value. In a decade, GILT Funds lost around 6.52% returns.
Conversely, Dynamic Bond Funds and Income Funds lost only 4.42% and 3.47% respectively. During 5 year period, dynamic bond funds have outperformed GILT Funds. The reason is the difference in the investment strategy.
The fund manager keeps adjusting the duration of the Dynamic Bond fund according to interest rate fluctuations. It ensures that your returns are in line with expectations. Conversely, GILT Funds follow a rigid strategy. Additionally, in the recent years, the GILT Funds NAVs have remained sticky to external changes. These didn’t rise as expected.
Dynamic Bond Funds are better investment havens than GILT Funds. If you don’t want sleepless nights, invest in Dynamic Bond Funds. Conversely, if higher returns are your priority, then go for GILT Funds.