Comparison: Short-term gilt vs. long-term gilt vs. Ultra short-term mutual funds

Published: October 8, 2015 at 9:07 pm

Here is a comparison between three types of funds (by choosing one in each category): Short-term gilts funds, Long-term gilt funds and ultra short-term gilt funds. In this post, I would like to reiterate a point made earlier about staying away from gilt funds unless we know how to trade in accordance with interest cycle movements.

Gilts do not have any credit risk. That does not mean they are devoid of risk. The NAV of gilt funds are marked to market. That is, the value of the bonds in the portfolio will equal the current market value. So when interest rates increase, the NAV falls and when rates decrease, the NAV increases. To understand this in detail, please refer to Understanding Interest Rate Risk in Debt Mutual Funds.

Long-term gilt funds hold GOI bonds that mature after several years:  Above 4.5 years if we use Value Research classification.

Short-term gilt funds: same as above with maturity below 4.5 years.

Ultra-short term: Funds can invest in any type of bond – GOI, corporate debentures, PSU debentures, bank certificate of deposits etc.

The advantage with this class is that, both interest rate risk and credit risk is minimised. The assumption here is that the fund manager does not buy too much of any one corporate or GOI bond like JP Morgan did. Read more: Lessons from the JP Morgan – Amtek Auto Debacle.

I have earlier shown using last 12-year annual returns that, although the gilt funds produce spectacular returns for a year or two, unless the investor books profit periodically, the gains would be erased by the interest cycle. Therefore, when it comes to investing in debt mutual funds: slow and steady wins the race!

Instead of returns, let us at how the NAV of following (randomly selected) funds evolve for different periods using  thefundoo’s awesome return comparison tool

short-term gilt fund – SBI Magnum Gilt Short-term plan (green line)

long-term gilt fund – Baroda Pioneer Gilt (violet)

ultra-short-term fund – HDFC Cash Management Treasury Advantage Plan.  (yellow)

Click on the images to enlarge.

Over last 3 months.
Over last 3 months.
last 6 months. Notice how wildly the NAV can swing for long-term gilt funds. Volatility is lower, but not absent for short-term gilts.
last 6 months. Notice how wildly the NAV can swing for long-term gilt funds. Volatility is lower, but not absent for short-term gilts.
Over last 1 Year.
Over last 1 Year.
Over last 3 years
Over last 3 years
Over last 5 years
Over last 5 years
over last 9 plus years
over last 9 plus years
over last 16 plus years
over last 16 plus years

Conclusions

  1. There is not much difference between ultra short-term  and short-term gilt funds  in terms of returns. The sharp gains made by short-term gilts are are gradually erased in time. So I see no point in having them part of a investment portfolio.
  2. Long-term gilts are a terrible choice for a long-term portfolio.
  3. Short-term gilts are better for opportunistic investing to take advantage of rate movements than long-term gilts. We will not gain as much as long-term gilts when rate come down, but we will also not lose as much.

Sankaran Naren, the CIO of ICICI Pru AMC, made an interesting remark in an interview: ‘I prefer to trade in fixed income and invest in equity’. I guess he was referring to timing the bond market and buying long-term gilts funds before the rate cuts begin, and exiting before the rates start to increase again.

Thanks to Mr. Raghu Ramamurthy for encouraging me to make this comparison.

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
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!
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 two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. 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 on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors 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 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 kind of paid articles, promotions or 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 right 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 low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep 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