Can we invest via SIP in gilt mutual funds for the long term?

Published on / By M. Pattabiraman Twitter: @pattufreefincal / 6 Comments

Published: June 5, 2020 at 11:41 am

Last Updated on December 29, 2021 at 5:34 pm

The titular question was posed by a reader a few days ago. Naturally, the AMC would allow a SIP from any MF, but does it make sense to start one in a gilt mutual fund that invests in long-term govt bonds? We look the SIP returns of I-BEX a composite sov bond index to understand what we must expect from a sip in gilt funds.

Suppose you had started a SIP in the I-BEX gilt index (assuming it was possible) in Aug 1994, almost 26 years before, what would be the annualised return as on 1st June 2020? Let us find out, but first some basics about gilt funds.

When you buy a gilt bond and hold it until maturity receiving interest income twice a year, there is virtually no risk (unless the govt becomes bankrupt). Interest change will not affect you. Sov bonds cannot be assigned a credit rating!

Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)

🔥Want to create a complete financial plan? Learn goal-based investing?  Exclusive access to our DIY tools? Increase your income with your skills? Enjoy massive discounts on our robo-advisory tool & courses! 🔥

If you wish to sell that gilt bond before maturity, then the market price will vary as per demand and supply. You can gain a lot of money if demand is higher or lose a lot if there is no demand. Longer the maturity of the bond, higher the daily price fluctuations.

A mutual fund NAV is marked to market. This means, irrespective of whether the fund manager buys and holds gilts bonds or sells them mid-way, the NAV will fluctuate daily as per market supply and demand.

For example, even if the market anticipates a rate cut, the price of existing gilt bonds will move up and so will the NAV. The opposite is also possible. So the argument price and interest rates move in the opposite direction is generally true but need not happen together.

So it is important for the reader to recognise that gilt mutual funds are incredibly volatile and it is possible to get negative returns over the short-term (few years) and low return over the long-term.  The annualised return will also fluctuate wildly on a day to day basis.

With these caveats in mind, let us look at examples. First a real-life one. My NPS is dominated by gilts and over the last 10 years given an XIRR of 9.62% (as on June 5th 2020) considerably better than my retirement equity MF portfolio return of 2.75% after 12 years!

MY NPS is a virtually a step-up SIP in gilts. That is the contribution increases each year with increments, DA, promotion and pay commission. See: Ten years of investing in the NPS: Performance report

Five-year SIP in gilts

Min 5Y XIRR: 3.31%
Max 5Y XIRR: 19.92%

Rolling 5-year SIP returns from I-bex gilt index. Each dot is a 5-Y SIP return from I-BEX Gilt index (before expenses and tax)
Rolling 5-year SIP returns from I-bex gilt index. Each dot is a 5-Y SIP return from I-BEX Gilt index (before expenses and tax)

Ten-year SIP in gilts

Min 10Y XIRR: 6.81%
Max 10Y XIRR: 14.40%

Rolling 10-year SIP returns from I-bex gilt index. Each dot is a 10-Y SIP return from I-BEX Gilt index (before expenses and tax)
Rolling 10-year SIP returns from I-bex gilt index. Each dot is a 10-Y SIP return from I-BEX Gilt index (before expenses and tax)

Fifteen-year SIP in gilts

Min 15Y XIRR: 8.12%
Max 15Y XIRR: 11.25%

Rolling 15-year SIP returns from I-bex gilt index. Each dot is a 15-Y SIP return from I-BEX Gilt index (before expenses and tax)
Rolling 15-year SIP returns from I-bex gilt index. Each dot is a 15-Y SIP return from I-BEX Gilt index (before expenses and tax)

Twenty-year SIP in gilts

Min 20Y XIRR: 8.72%
Max 20Y XIRR: 10.21%

Rolling 20-year SIP returns from I-bex gilt index. Each dot is a 20-Y SIP return from I-BEX Gilt index (before expenses and tax)
Rolling 20-year SIP returns from I-bex gilt index. Each dot is a 20-Y SIP return from I-BEX Gilt index (before expenses and tax)

Does it make sense to long-term SIP in gilt MFs?

Clearly the answer is yes. Provided we have the maturity to face huge ups and downs in the journey, stick to the SIP and rebalance either systematically or tactically (shall be discussed later) with a clear goal in mind. Provided our expectations after tax and loads is not too high.

The reader should appreciate the decreasing number of data points in the above graphs as we went from 5–> 10 –> 15 –> 20 years. Also going forward gilt yield would go down over the long term and past performance should not be used as an indication of the future.

Trivia: The 26-year SIP started in the I-BEX gilt index in Aug 1994,  would have resulted in an XIRR of 9.98% as on 1st June 2020.

Do share this article with your friends using the buttons below.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! 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 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! 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 and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We 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, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? 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 parents plan for it, as well as teaching 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 is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. 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 with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information:  To get in touch, use this contact form. (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 and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
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 into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and 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 300 (instant download)