SBI Magnum Gilt Fund Invest Online
Investors in the fixed income category have been left panting for more over the last year or so, with the yield on 10-year government bond standing its ground, despite sharp policy rate cuts by the RBI.
After a good run in 2014, gilt funds, which primarily invest in government bonds, delivered modest returns in 2015. This is thanks to the yield on 10-year G-sec ruling high at 7.7-7.8 per cent through 2015. But for new investors, the current yield on 10-year G-sec offers a good entry point.
With one uncertainty — the US Fed rate hike — out of the way, the RBI is likely to resume its rate cuts post the Budget when clarity on the fiscal front emerges. A fall in inflation against the 5.8 per cent targeted for January 2016 can also open up the doors for further rate cuts. Besides, investors can take comfort in the fact that the narrowing of the spread between the RBI's policy rate and the yield on the 10-year G-Sec (at about one percentage point now) itself offers enough scope for a bond rally.
Investors willing to take a long-term view can invest in SBI Magnum Gilt Fund - Long term Fund. It has outperformed its category across one three and five-year time horizons. The fund has been in the top quartile of its category across time periods.
Nimble on its feetGiven that investing in gilt funds entails interest rate risk, investors should go for funds that actively manage this risk by tweaking its duration. If the interest rates move up, bond prices fall, and vice-versa.
As longer duration bonds are more sensitive to interest rates, the fund manager will increase duration in a falling rate scenario to cash in on the rally in bonds.
SBI Magnum Gilt Fund - Long term has actively managed its duration. Coming out of a downward rate cycle in March 2010, the fund reduced its duration and then upped it during the April 2012-May 2013 period, to 7-8 years to cash in on the bond rally. The fund also kept its duration high at 6-8 years through 2014, delivering 19.6 per cent return and beating category average by a hefty 3 percentage points.
The fund capped its losses well too during rising rate cycles. During the tightening phase of May-September 2013, the fund managed to cut its losses to 4.8 per cent, while category returns slipped by a little over 6 per cent.
For debt funds, expense ratio makes a notable difference in a fund's performance.
Some actively managed gilt funds have a high 1.5-2 per cent expense ratio. But SBI Magnum Gilt has a lower 0.73 per cent expense ratio.
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