Can we get better returns by timing entry & exit from gilt mutual funds?

Published: June 11, 2020 at 11:33 am

Last Updated on April 10, 2021

Gilt mutual funds can be tricky to understand. Those who assume they have invested in “safe” govt bonds would be shocked to see how much their prices (NAV) fluctuates daily and can even lead to negative or low returns over a few years. In this article, we find out if a market timing method can be applied to gilt mutual funds for better returns and/or lower risk.

Readers may recall we had employed a double moving average strategy to backtest timing gold purchases – Is this a good time to buy gold? A tactical buying strategy for gold – and timing equity purchases – This “buy high, sell low” market timing strategy surprisingly works! We find out how this can be extended to gilts.

Readers unfamiliar with gilt funds may please consult (1) Gilt mutual funds will not protect your money! Recognize risks before investing! (2) Can we buy gilt mutual funds now? They have given more than 10% returns in the last year! (3) Can we invest via SIP in gilt mutual funds for the long term?

It must be kept in mind that long-term SIPs in gilt funds (see article 3 above) have been quite productive in the past and should at the very least provide an FD-like return before tax (better than FD after tax for those in 20% and above slabs).


Therefore a simple systematic rebalancing with equity is all that is necessary for most retail investors. However, we still need to satisfy our curiosity if timing would work with gilt mutual funds.

We shall compare a systematic investment in gilt funds, represented by the I-BEX composite gilt index and gilt fund + cash portfolio. The cash portfolio would earn a steady return of 0.5% a month (about 6%  a year).

Shown below are the I-BEX and its six and twelve-month moving averages (6MMA and 12MMA). The dotted line (6>12) is the buy/sell signal as used in the previous gold and equity backrests. When the 6-month average is greater than then 12-month average the buy signal = 1 and 0 otherwise

I-bex gilt index with six and twelve month moving averages and buy-sell indicator
I-bex gilt index with six and twelve-month moving averages and buy-sell indicator

When the buy signal =1, we sell cash and move to gilts. Further SIPs are also into gilt. When the buy signal = 0, we sell gilts and move to cash. Further SIPs are also into cash.

However, notice that the buy/sell signal =1 for most of the IBEX’s history. Therefore the NAV of a gilt mutual fund cannot be used for timing. Instead, we shall use the 10-year gilt yield.

Since yield and price are inversely proportional to each other, we work with the inverse of the 10Y bond yield. This would serve as a bond PE ratio. Recall that the inverse of the Nifty PE is known as the earnings yield. See: Has the market recovered already? Did it even crash?

I-bex gilt index in red and inverse of 10-year gilt yield in blue
I-bex gilt index in red and inverse of 10-year gilt yield in blue

Notice that the 10Y bond PE is significantly more sensitive than the IBEX price. So we shall use this for our gilt timing backseat. Now the buy/sell signal = 1 when the 6MMA of the bond PE > 12MMA  and buy/sell signal = 0 when the 6MMA of the bond PE < 12MMA

Inverse of 10-year gilt yield along with six and twelve month moving averages and buy-sell indicator in dotted line
The inverse of 10-year gilt yield along with six and twelve-month moving averages and buy-sell indicator in dotted line

The backtest result for 10 years is shown below. Top left panel: the XIRR for each of the 138 10-year backrests are shown (higher the better!). The tactical approach has rarely beat the systematic approach (not taxes and exit loads are not accounted for)

Tactical asset allocation with gilt double moving averages for 10 years and 138 periods
Tactical asset allocation with gilt double moving averages for 10 years and 138 periods

Top right panel: The maximum drawdown (max fall from peak) of the portfolio is shown (less negative the better). For some runs, the tactical approach has a lesser drawdown. Bottom left panel: The standard deviation or volatility (lower the better). The tactical approach has lower volatility.  Bottom right panel: the max no of months the portfolio was below its peak or underwater (lower the better). The tactical approach does marginally better.

Results over 15-years show a similar trend. Returns are less than the systematic approach but the risk is noticeably and more consistently lower.

Tactical asset allocation with gilt double moving averages for 15 years and 78 periods
Tactical asset allocation with gilt double moving averages for 15 years and 78 periods

An alternative timing approach was also tried. Buy gilts when bond PE is greater than both 6MMA and 12MMA. Sell gilts when bond PE is less than both MMAs.

Results for 10 years is shown below. The tactical approach now beats the systematic approach for some runs and more importantly does not underperform. Although the max drawdowns are the same, the volatility is lower and the no of continuous months underwater is lower.

Tactical asset allocation with gilt yields for 10 years and 144 periods
Tactical asset allocation with gilt yields for 10 years and 144 periods

Over 15-years the tactical XIRR is better, but the volatility and max drawdowns are similar to the systematic approach.

Tactical asset allocation with gilt yields for 15 years and 84 periods
Tactical asset allocation with gilt yields for 15 years and 84 periods

Similar studies were with only the six months moving average of the 10Y gilt PE. This is the15-year rolling backtest data. That is, buy gilts when current PE > 6MMA and sell if less.

Tactical asset allocation with six month MMA gilt yields for 15 years and 84 periods
Tactical asset allocation with six months MMA gilt yields for 15 years and 84 periods

This result is for timing with a three-month moving average and 15Y investment duration. That is, buy gilts when current PE > 3MMA and sell if less.

Tactical asset allocation with three month MMA gilt yields for 15 years and 84 periods
Tactical asset allocation with three months MMA gilt yields for 15 years and 84 periods

Clearly shorter duration moving averages have done much better in terms of returns and risk compared to the systematic approach. This is because of the sharp movements in the bond yield.

However, no of buy/sell transactions will sharply increase with shorter moving averages. For examples for six MMA the typical no of buy/sell transactions over a 15Y period is only 16. This is pretty much the same as systematic (annual) rebalancing. If we use three MMMA then the no transactions increase to 30-32. Considering tax and loads this becomes a little too much.

Thus it is important to strike a balance between returns, risk and tax and the 6MMA strategy or even the combination of 6,12 MMA fare reasonably well. The next step in this series is to combine all four asset classes – equity, gilts, gold and cash and time them together.

Update:   A tool for tactical buying based on the above strategyis now available.

Do share if you found this useful

Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 640 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 2525 investors and advisors are part of our exclusive Facebook Group! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 585 salaried employees, entrepreneurs and financial advisors are part of our exclusive Facebook Group! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos in an exclusive Facebook Group!   
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps