Select Gilt Funds Performance
(This
is for information purposes only. This should not be construed as a
recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial
adviser before taking any investment decision. Safe to assume the author has a vested
interest in stocks / investments discussed if any.)
(A new blog dated 14Apr2024 and named 'Gilt Funds Worth Considering!' is available here)
During the last meeting of Reserve Bank of India's Monetary Policy Committee (MPC) on 08Feb2024, the MPC decided to keep the Committee's stance as 'withdrawal of accommodation,' though bond market was expecting a change of stance to 'neutral.'
RBI is India's central bank.
Government bond prices and yields in India are largely impacted by decisions of MPC, changes in policy repo rates and reverse repo rates, stance of the monetary policy and India's fiscal deficit.
The main policy rate of RBI, that is, LAF Repo rate, has been kept unchanged at 6.50 percent since Feb2023. In the past one year, India's consumer price inflation (CPI) is all over the place, moving between 4.30 percent and 7.4o percent.
RBI's monetary policy has clearly not been able to rein in inflationary pressures, which are driven more by supply chain issues, lack of competition, inefficienciences in food and agricultural commodities and others.
Gilt Funds Performance
As explained in a previous blog dated 24Apr2022, the return performance of gilt funds is impacted by interest rate expectations and overall health of an economy. Though gilt funds have almost zero default risk, they are highly vulnerable to interest rate risk.
(blog continues below)
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Related blogs:
Are Gilt Funds Attractive Now? 24Apr2022
How to Invest in Gilt Funds? 18Aug2012
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At the time of the previous blog, readers were informed that gilt funds were attractive for conservative investors with a view of two to three years. It's almost two years since the blog was written. So, how have gilt funds performed in the past two years?
This blog is an attempt to analyse their performance in the past two years, specifically between 22Apr2022 to 01Mar2024.
Table 1 details performance of select gilt funds >
Table 1 reveals:
> performance of 12 gilt funds including one gilt ETF or exchange traded fund
> all the returns are for direct plans with growth options
> performance of ICICI Pru Nifty 50 index fund (direct plan / growth option) is added just for comparison purposes
> the point-to-point returns from 22Apr2022 to 01Mar2024 are compounded annual growth rates
> HDFC gilt fund and UTI gilt fund delivered lowest point-to-point return (CAGR) of 6.8% and 6.9% respectively, among the select 12 funds
> SBI Magnum gilt fund and ICICI Pru gilt fund delivered the highest returns of 8.2% and 8.1% respectively
> the returns are not bad considering the fact that there is not much change in the benchmark India 10-year G-Sec bond yields, though they are very volatile
> the 10-year G-Sec yield was 7.17 percent on 22Apr2022 and now it is at 7.06 percent -- it may be noted bond yields and prices move inversely
Graph showing India 10-year G-Sec bond yield >
> but when you compare the gilt fund returns against the actual inflation of six to seven percent in the past two years, the returns are a meagre one percent for funds that delivered the highest point-to-point returns
Tables 2 and 3 show details of these 12 gilt funds: expense ratios, net assets, 3-year returns, annual returns and names of fund managers >
please click on the image for a better view >
Tables 2 and 3 delineate:
> performance of 12 gilt funds including one gilt ETF or exchange traded fund
> all the returns are for direct plans with growth options
> performance of ICICI Pru Nifty 50 index fund (direct plan / growth option) is added just for comparison purposes
> if you observe annual returns from 2016 to 2023 (table 3), gilt fund returns are volatile
> when interest rates come down and bond yields fall as was the case in 2016 and 2020, gilt funds provide high returns
> and when interest rates go up or remain the same 2017 and 2022, they provide very low returns much below the rate of inflation
Gilt funds analysed above have provided decent returns in calendar year 2023, though on an inflation-adjusted basis, their returns are meagre.
India is having Parliamentary elections scheduled in May of this year. The actual dates of the polls are yet to be announced by India's Election Commission.
The next meeting of RBI's MPC is scheduled for April 3rd to 5th of this year. What India's central bank would do ahead of the polls is interesting to watch.
Basically, central banks are political animals. In general, they try to accommodate the views of ruling party or parties -- especially on the eve of elections. India's central bank is no exception.
India's current fiscal deficit is high by historical standards. Indian bond yield movement will also, to some extent, be impacted by the decisions of major central banks, like, the US Federal Reserve and European Central Bank (ECB).
JP Morgan's decision to include Indian bonds, effective Jun2024, in its EM bond index is a positive for Indian bonds -- meaning bond prices might go up (with yield falling concomitantly) depending the speed and volume of foreign fund flows.
Forecasting the trajectory of inflationary expectations, how RBI reacts to inflationary pressures and what path interest rates would undertake in future are hard things.
But considering India's higher tax collections, RBI yielding to government's pressures on the eve of polls, higher foreign fund inflows, possible anchoring of fiscal deficit and inflationary pressures by the government and monetary authorities, it is expected bond yields in India may fall to some extant in the next two to three quarters -- providing some cheer for gilt fund investors in 2024.
(The author has a vested interest in financial markets. This should not be construed as investment advice. This is just for information only. Readers should consult their own advisers before making any investment decisions.)
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Additional data:
Table 4 provides quarterly data of total AUM of all gilt funds since Sep2019 till now >
Between Mar2022 and Jan2024, net assets of gilt funds grew by 76 percent to Rs 26,700 crore. Official CPI inflation fell from 6.95% to 5.1%, while 10-year G-Sec yield rose from 6.81% to 7.18% in the same period.
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References:
MPC (Monetary Policy Committee) Resolution 08Feb2024
India 10-year G-Sec bond yield - World Government Bonds
India 10-year G-Sec bond yield - Investing.com
Gilt funds VR data
point-to-point returns VR data
ICICI Pru Nifty 50 index fund data
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Disclosure: I've got a vested interest in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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