Is this the right time to buy gilt mutual funds?

Published: April 10, 2021 at 11:25 am

Last Updated on December 29, 2021 at 5:35 pm

Over the past few days, several readers have asked, “Is this the right time to start buying gilt mutual funds?”. This is because of our repeated stress on gilt funds being a suitable choice or accompaniment to EPF/PPF for long-term goals. See: PPF vs Gilt mutual funds: Which has done better over 15 years? And Why I partially switched from ICICI Multi-Asset Fund to ICICI Gilt Fund?

Let us start with the basics. Gilt mutual funds predominantly invest in govt. bonds (aka gilts because historically govt bonds were printed on gilt/gold-edged paper ). Although the credit risk in such funds is minimal (govt bonds cannot be rated for a resident investor!), the NAV of such funds will fluctuate wildly!

The longer the duration (date until maturity) of the bonds in the portfolio, the more will be the NAV fluctuations. This because of demand-supply fluctuations in the bond market.  In many gilt funds (and dynamic bond funds) the fund manager will change the duration of bonds held in the portfolio as per present bond market conditions and their reading of the future. Let us refer to this as “managing duration risk”. For a basic introduction to this risk, see: Why you need to worry about “duration” if your mutual funds invest in bonds

There two types of gilts funds” the constant maturity gilts funds that predominantly hold 10-year bonds and the “plain” gilt funds.  The constant maturity funds will have an average portfolio maturity of close to 10 years at all times. Hence the volatility will be higher but since the fund manager will indulge in trying to manage duration risk, the fund is like an (expensive) index fund.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

The plain gilt variety will typically have funds that will try and manage duration risk. Some will do this activity and some in a rule-based manner.  As a follow up to this article, I shall discuss what to look for in a gilt fund.

Now, let us focus on the question before us: Is this the right time to buy gilt mutual funds? When should investors consider gilt funds (both types)? Only for long-term goals, a minimum of ten years away.

So if your need is 10+ years away, you do not have to worry about the “current bond market situation”. What you should worry about is, “can I really stomach gilt fund NAV fluctuations? or will I run away at the first sight of negative returns?”

If you are interested in gilt funds, please start small. Invest a small sum each month, manually or via SIP and get used to the volatility for a while and then gradually increase exposure.

When I talk about investing my money in gilt funds, investors should note that I have more than a decade of experience of watching gilt fund NAV fluctuate in my NPS portfolio, including a bond crash in July 2013. See: Ten years of investing in the NPS: Performance report

It is not easy to stay invested in gilt funds but for the long-term the odds of managing the risk is acceptable. The odds of a liquid fund or money market fund being risky over the long term is high (yes, you read that right), see: Can I use liquid funds for long-term goals with equity MFs?

Investing (life) is all about identifying reasonable odds and ensuring they stay reasonable in our personal journey. When people say they fear “market risk”, they are being unreasonable and no good decision ever came out of that corner.

If you are a systematic investor or a systematic risk manager (hopefully both) then you are done. The remainder of the article is about timing entry into gilts, not relevant for the systematic investor. The only takeaway if you read it is if you start investing in gilt funds, do not expect “good returns” immediately. This is an uncertain time.

There is a second aspect to the titular question. If I wish to “time” my exit and entry into gilt funds, is this a good time to enter? We have already discussed ways (with backtesting results) in which one can time the gilt market and which of these have “reasonable odds” – Can we get better returns by timing entry and exit from gilt mutual funds? Note: No timing method has worked all the time in the past and therefore no timing method will work all the time in the future. It is a question of reasonable odds of lowering risk vs returns vs tax associated with churn.

The method discussed involves looking at the gilt PE = 1/10Y-gilt-yield.

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

The idea to consider when the 10Y bond PE is greater than both its 6-month and 12-month moving average. This is a buy signal. The opposite, when the bond PE is lower than both the averages is a sell signal. Backtest results are available in the above-mentioned link.

The following graphs are sourced from the freefincal moving average market timer.

10-year gilt bond PE plotted alongside its six-month and 12-month moving average
10-year gilt bond PE plotted alongside its six-month and 12-month moving average.

The region around the marked oval is expanded below. Notice that the bond PE was > 6MM and 12 MMA (buy zone) from late 2018 and fell down only in Jan 2021. Thanks to RBI intervention, the PE has gone back. As of 1st April, the PE was still below both averages and as of 9th April, the PE has crossed the green (6mma) line but still below the red line (12 MMA).

10-year gilt bond PE plotted alongside its six-month and 12-month moving average since Jan 2018
10-year gilt bond PE plotted alongside its six-month and 12-month moving average since Jan 2018

IF you wish to adopt a tactical strategy for gilts and IF you wish to use the above model, then at the very least it is neither a time to buy nor a time to sell. RBI keeping rates constant on April 7th has made a big difference but the uncertainty has not gone away. The govt wants bond buyers to accept existing coupon rates. The buyers want higher rates. This tug-o-war can continue for the next few months.

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 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => 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 over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

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: 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 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)