Here is a thread on evaluating Gilt funds:
For a detailed version visit:
fundsindia.com/blog/mf-resear…
It all starts with the simple question:
Is this the time to buy Gilt Funds?
Let us find the answer using different vantage points from 6 eccentric folks..
For a detailed version visit:
fundsindia.com/blog/mf-resear…
It all starts with the simple question:
Is this the time to buy Gilt Funds?
Let us find the answer using different vantage points from 6 eccentric folks..
Here is a thread on evaluating Gilt funds:
For a detailed version visit:
fundsindia.com/blog/mf-resear…
It all starts with the simple question:
Is this the time to buy Gilt Funds?
Let us find the answer using different vantage points from 6 eccentric folks..
For a detailed version visit:
fundsindia.com/blog/mf-resear…
It all starts with the simple question:
Is this the time to buy Gilt Funds?
Let us find the answer using different vantage points from 6 eccentric folks..
1)
QUICK GUN MURUGAN: Looks at problems using intuition, gut reaction, and emotion!
Reaction 1: Credit Risk Funds are going through several issues – defaults, downgrades, redemption pressure, illiquidity, concentration risk etc.
QUICK GUN MURUGAN: Looks at problems using intuition, gut reaction, and emotion!
Reaction 1: Credit Risk Funds are going through several issues – defaults, downgrades, redemption pressure, illiquidity, concentration risk etc.
2)
Reaction 2: A lot of credit risk funds have given poor returns in the last 1-2 years.
FT recently has closed 6 of its credit risk oriented funds!
Conclusion:
I guess it is better to stay away from credit risk and stick to safe high credit quality debt funds.
Reaction 2: A lot of credit risk funds have given poor returns in the last 1-2 years.
FT recently has closed 6 of its credit risk oriented funds!
Conclusion:
I guess it is better to stay away from credit risk and stick to safe high credit quality debt funds.
3) What can be a safe option?
Gilt funds which lend only to government!
Let me check the returns
Gilt funds which lend only to government!
Let me check the returns
4)
Wow! Great SAFETY & Great RETURNS - Let me buy Gilt funds..
This is a perspective that most of us have..but hang on.. let us check the other perspectives as well..
Wow! Great SAFETY & Great RETURNS - Let me buy Gilt funds..
This is a perspective that most of us have..but hang on.. let us check the other perspectives as well..
5)
CURIOUS KID: Damn curious & asks a lot of questions
If the last 1 year, average returns of gilt funds are 13.4%. So I should have invested 1 year back.
But why didn’t I invest then?
What was the fund’s underlying interest rate (YTM) a year back?
CURIOUS KID: Damn curious & asks a lot of questions
If the last 1 year, average returns of gilt funds are 13.4%. So I should have invested 1 year back.
But why didn’t I invest then?
What was the fund’s underlying interest rate (YTM) a year back?
6)
The govt had borrowed money from this fund at ~7.2%. So logically we were supposed to make 7.2% - Expense ratio (1.1%) at 6.1%. How did we end up with 13.4% returns?
Where in the world did that extra 7.3% (13.4% minus 6.1%) return come from?
The govt had borrowed money from this fund at ~7.2%. So logically we were supposed to make 7.2% - Expense ratio (1.1%) at 6.1%. How did we end up with 13.4% returns?
Where in the world did that extra 7.3% (13.4% minus 6.1%) return come from?
7)
What is the underlying interest rate now?
The current Net YTM is 4.9%. So should I expect 4.9% returns going forward?
Or like last year will I get a similar extra return?
What if it becomes lower than 4.9%?
Someone care to explain??
What is the underlying interest rate now?
The current Net YTM is 4.9%. So should I expect 4.9% returns going forward?
Or like last year will I get a similar extra return?
What if it becomes lower than 4.9%?
Someone care to explain??
8)
MR SPOCK – inspired from the super rational Star Trek character
Past returns are already over. I am only worried about how much I will make going forward.
MR SPOCK – inspired from the super rational Star Trek character
Past returns are already over. I am only worried about how much I will make going forward.
9)
What will be my future returns?
1 Year Returns = Net YTM + NAV changes due interest rate movement*
NAV changes due interest rate movement = (-1) (Modified Duration) * (Change in yields)
What will be my future returns?
1 Year Returns = Net YTM + NAV changes due interest rate movement*
NAV changes due interest rate movement = (-1) (Modified Duration) * (Change in yields)
10)
Looking at past returns (13.4% in last 1 year), we might expect same returns.
However, out of the 13.4% returns, ~6.1% returns came from the Net YTM (6.1%). The extra 7.3% were predominantly due to gains from fall in yields (~120 bps or 1.2%)
Looking at past returns (13.4% in last 1 year), we might expect same returns.
However, out of the 13.4% returns, ~6.1% returns came from the Net YTM (6.1%). The extra 7.3% were predominantly due to gains from fall in yields (~120 bps or 1.2%)
11)
Using the same logic, the current Net YTM is ~4.9%. Whether you make returns higher or lower than this will depend on how yields move - If yields go down, you will make higher returns and vice versa.
What can be the rough return expectation for different yield movement?
Using the same logic, the current Net YTM is ~4.9%. Whether you make returns higher or lower than this will depend on how yields move - If yields go down, you will make higher returns and vice versa.
What can be the rough return expectation for different yield movement?
12)
HISTORY PROFESSOR: Ardent believer of the Mark Twain quote ‘History doesn’t repeat itself but it often rhymes’
HISTORY PROFESSOR: Ardent believer of the Mark Twain quote ‘History doesn’t repeat itself but it often rhymes’
13)
He has 4 questions:
Q1: Do past returns predict future returns in Gilt funds
Gilt funds - wider range of return outcomes - Usually above average returns are followed by below average returns which is mostly a reflection of interest rate movements.
He has 4 questions:
Q1: Do past returns predict future returns in Gilt funds
Gilt funds - wider range of return outcomes - Usually above average returns are followed by below average returns which is mostly a reflection of interest rate movements.
14)
Takeaway 1: Past returns are a poor predictor of future returns in gilt funds
Q 2. Are Gilt funds more volatile?
Takeaway 2: Gilt funds have far higher volatility + higher drawdowns or intermittent declines + Higher occurence of negative returns across time frames
Takeaway 1: Past returns are a poor predictor of future returns in gilt funds
Q 2. Are Gilt funds more volatile?
Takeaway 2: Gilt funds have far higher volatility + higher drawdowns or intermittent declines + Higher occurence of negative returns across time frames
15)
Q3: 3. Do Gilt funds compensate for their volatility with higher long term returns?
Over long periods, gilt fund returns have been very similar to short term funds
Q3: 3. Do Gilt funds compensate for their volatility with higher long term returns?
Over long periods, gilt fund returns have been very similar to short term funds
16)
For the last 15 year period,
3Y rolling return average of Gilt funds are 8.19 % vs Short Term funds at 8.22%
5Y rolling return average of Gilt funds are 8.17% vs Short Term funds at 8.25%
Takeaway 3: Long term returns of Gilt funds are similar to short term funds
For the last 15 year period,
3Y rolling return average of Gilt funds are 8.19 % vs Short Term funds at 8.22%
5Y rolling return average of Gilt funds are 8.17% vs Short Term funds at 8.25%
Takeaway 3: Long term returns of Gilt funds are similar to short term funds
17) Where do current yields stand wrt history?
Takeaway 4: These are very low levels of yield compared to long term history. The 10Y Gsec has traded below these levels only for a very short period of time (6.3% of the times since 1998).
Takeaway 4: These are very low levels of yield compared to long term history. The 10Y Gsec has traded below these levels only for a very short period of time (6.3% of the times since 1998).
18)
MR PESSIMIST – What can go wrong?
Interest rates may go up because:
Rising Government Debt
Fiscal Deficit Concerns
RBI may not completely absorb the fiscal deficit funding
Taxation: 3Y required for long term taxation hampers exit flexibility if interest rate cycle turns
MR PESSIMIST – What can go wrong?
Interest rates may go up because:
Rising Government Debt
Fiscal Deficit Concerns
RBI may not completely absorb the fiscal deficit funding
Taxation: 3Y required for long term taxation hampers exit flexibility if interest rate cycle turns
19)
MISS OPTIMIST: What can go right?
If interest rates go down, the returns of Gilt funds will be very good :)
Interest rates may come down because:
Weak GDP Growth
Low inflation
Low Oil Price + Subdued CAD
Accommodative monetary policy
High liquidity
Weak Credit Growth
MISS OPTIMIST: What can go right?
If interest rates go down, the returns of Gilt funds will be very good :)
Interest rates may come down because:
Weak GDP Growth
Low inflation
Low Oil Price + Subdued CAD
Accommodative monetary policy
High liquidity
Weak Credit Growth
20)
Low Global Interest Rates
RBI may absorb Fiscal deficit funding
Higher spreads
Now that we heard these 6 different view points, how do we wrap our heads around these..
Low Global Interest Rates
RBI may absorb Fiscal deficit funding
Higher spreads
Now that we heard these 6 different view points, how do we wrap our heads around these..
21)
Final View:
Gilt funds Charachteristics
1) No Credit Risk
2) But interest rate risk is high
3) Need to time interest rate cycle - easier said than done - Several factors affect interest rate cycle
4)Taxation Constraints for tactically moving out
Final View:
Gilt funds Charachteristics
1) No Credit Risk
2) But interest rate risk is high
3) Need to time interest rate cycle - easier said than done - Several factors affect interest rate cycle
4)Taxation Constraints for tactically moving out
22)
Not a big fan of the category due to:
The need to time interest rate cycle – even seasoned fund managers have got this wrong often
Higher volatility leading to inconsistent investor experience
Exiting before 3 years leads to higher short term taxation
Not a big fan of the category due to:
The need to time interest rate cycle – even seasoned fund managers have got this wrong often
Higher volatility leading to inconsistent investor experience
Exiting before 3 years leads to higher short term taxation
23)
For investors wanting to take a shot at higher returns via gilt funds, have a framework to exit the category as you see initial signs of the interest rate cycle turning. Worst case be prepared to hold it for a longer time frame (5-7 years) to even out the volatility.
For investors wanting to take a shot at higher returns via gilt funds, have a framework to exit the category as you see initial signs of the interest rate cycle turning. Worst case be prepared to hold it for a longer time frame (5-7 years) to even out the volatility.
