Thread by @TheWealthVed

Gilt MFs - Busting the Trader’s myth

These days many debt MF investors are looking at GILT funds for investment purpose - lets decode the GILT Funds (1/n)

#mutualfunds #gilt #debt

These funds invest in government securities of various maturity periods - thus too less credit risk but factors such as change in interest rate and gsec valuation etc. drive the volatility in NAV of these funds. (2/n)

When Govt of India needs money, the RBI issues fixed-term government securities. These are picked up by the gilt fund manager - he plays on coupon, duration and interest rate outlook. (3/n)

Gilt funds have higher modified duration, meaning higher interest rate sensitivity. Ex. - a GILT fund with 6 years of modified duration will rise by 6% if there is an interest rate cut of 1% (assuming all other factors stay the same) - yes, they have inverse correlation. (4/n)

So, if all other factors remains the same, a falling interest rate regime would be the best time to invest in gilt funds. (5/n)

Since the increasing credit risk and liquidity issues in lower credit rating debt instruments, various investors are looking at Gilt funds as THE safest and yield generating investment options (6/n).

In last 5 years, most of government debt oriented funds have generated huge CAGR - a major driving factor for investors to see this category as kind of safe heaven.
(7/n)

Remember, we are/were in falling interest rate enviornment. RBI is doing everything it can (by tinkering Repo rate) to revive falling economic growth. (8/n)

Factors such as FPI/FII money movement, RBI policy, govt's borrowing plans, RBI's OMOs in debt segment, certain major credit fiascos (IL&FS, DHFL, Franklin MFs, BOI Credit Funds) have been a major driver of 10-yr Gsec movement.

Trust me its too much volatile.

#RBI #gsec

Bond prices behave along with the movement in gsec as it drives the spread between various maturities.

Remember - The Gilt funds have higher duration, the returns were historical (driving factor was falling interest rate environment).

Gilt: Although there is a high degree of safety in these funds, the Modified Duration of Gilt securities is very high. It would cause high fluctuations in the portfolio value whenever there is an interest rate change. 11/n

Remember Asset Allocation and Investment Horizon - try to match your investment duration with debt funds' duration.

For least volatility - please stay with highest credit quality, lowest modified duartion debt funds. (n)

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