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!
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%
Ten-year SIP in gilts
Min 10Y XIRR: 6.81%
Max 10Y XIRR: 14.40%
Fifteen-year SIP in gilts
Min 15Y XIRR: 8.12%
Max 15Y XIRR: 11.25%
Twenty-year SIP in gilts
Min 20Y XIRR: 8.72%
Max 20Y XIRR: 10.21%
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.
We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
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!
Join our courses in exclusive Facebook Groups!
- 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). 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 how to achieve by showcasing your skills and building a community that trusts you and pays you!
- Goal-based portfolio management! Join 2220+ members and 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 of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content) 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.
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
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. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger 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] comAbout 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 one million readers a year (2.5 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
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published 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
This 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
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
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "goodbye" to your employer (Google Play Store)