I actually got in only in Mid-November, with a substantially larger amount of money than I had initially planned, into Prudential ICICI's Gilt Fund (Investment Plan). The fund has done real well and is fully invested in G-Secs. I show two points - one when I should have entered (showing off) and one when I did.
The fund has returned 10% in a month, and nearly 20% since October. (I have only got about 7% due to my staggered entry, but who's complaining) I invested in the dividend payout option, where they paid out 5% of the existing NAV in November. The NAV fell 5% then - and since has recovered to go about 2% above the buy price. And, the dividend is tax free. Double the happiness.
I'm holding, for the next year or so. Using complex mathematics that can blow a hole in your wall, I have found that a further 1% drop in yield can lead to another 7% gain in prices. All we need is dropping inflation and more problems with growth; not entirely off the cards, one thinks.
There is risk in gilt funds. Being highly liquid they are marked to market every day, and if there is a flight away from quality the yields may go up. Unless inflation rears its head again, I doubt we will see yields increase (which will depress bond prices). Still, one must remember that these aren't "floaters" - there is a chance you will lose money in a gilt fund.
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>Hi Deepak,
> I have found that a further 1% drop in yield can lead to another 7% gain in prices.
Pardon my naivety, is the inverse also true ? Just wondering about the amount of risk and when one should get out of gilt funds …
Thank you very much,
Raj.
12.12.08 at 5:55 AM
>On the downside- a 1% yield increase will result in a 6.5% drop in prices. So yes, it’s even either way.
12.12.08 at 6:23 AM
>1. I notice that Prudential ICICI’s gilt investment “PF” fund seems to be better than the just investment plan but the former looks to be a close-ended fund. did you try buying the former?
2. How do medium-term debt funds (say, a Birla Dynamic Bond Fund, compare with a gilt fund? I thought medium-term funds give you best of both the worlds – benefit from falling yields and then they are also floating in nature (being medium-term in nature). what do you say?
12.12.08 at 6:57 AM
>Hi Deepak,
Just pardon my doubt here ?
I do not follow Gilt that much, just want to know whether the 10% or 20% mentioned is the annualized rate of return or is it the monthly return.I mean did the Rs.10 invested give Rs.11 in a month.
Regards,
Hari
12.12.08 at 10:34 AM
>Anon:
1) PF is not something I can invest in – it’s open ended, but my online service doesn’t let me get in. I assumed it was off bounds so didnt’ bother.
2) Bond funds that take on corp debt have a higher risk and teh yields may not contract there. Only a reasonable yield contraction will give you good returns.
Hari: All aer absolute percentages, not annualized.
12.12.08 at 10:47 AM
>Longer Term Gilts behave like stocks. It is better to avoid them at this moment as the rate cuts are already in the price.
Instead better to go for shorter term Govt. Securities. Though yield may be less your capital will be better protected.
Corporate Bonds AAA seems to be a good bet now since they lag the Gilts.
12.12.08 at 10:53 AM
>Hi Deepak,
The NAV’s of gilt funds are heading south, is this the time to get out ?
Thnaks,
Ananth
12.23.08 at 3:11 AM
>Ananth: Too early to make a call – plus, I only expect interest rates to fall further in the coming year.
12.23.08 at 4:16 AM
>I dont undrstand one thing. How the gilt funds which display their holdings in Govt. Securities with coupon rates 0f 7 to 9 % are able to give returns of 20 to 30%. Please explain as I am new to this area. And if they can do it, can we also do the same by directly investing into G-Secs?
01.11.09 at 11:30 AM