Whether Gilt Mutual Funds are Safe?

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Considering the current credit rating downgrades, default risks, and the falling interest in Bank FDs, many are desperately looking for a safe haven to invest. Hence, recently someone asked me whether the Gilt Mutual Funds are safe? Let us understand reality.

What are Gilt Mutual Funds?

Let us see the current definition of Gilt Mutual Funds as per the SEBI. Because all AMCs have to follow the definition of SEBI to construct their portfolio.

The scheme characteristics is mentioned as “Minimum investment in Gsecs-80% of total assets (across maturity)“.

The uniform description is mentioned as “An open-ended debt scheme investing in government securities across maturity”.

Hence, as I mentioned in my earlier post, here also SEBI is not restricting the fund managers with respect to maturity (Refer my post on this aspect “Debt Mutual Funds – Truths Mutual Fund Companies did not tell you“).

Whether Gilt Mutual Funds are Safe?

# Default or Downgrade Risk:- Gilt Mutual Funds will give you the protection from default or downgrade risk. Because 80% of the portfolio is in Government securities. This is the ONLY SAFE point here with respect to Gilt Mutual Funds.

# 20% of your portfolio is still risky:- If you go by the definition of SEBI, you noticed that 80% of your portfolio should be in Gsec. However, there is a freehand for the fund manager to invest the remaining 20% as per his wish. Even though 20% of these Gilt Mutual Funds invest in cash and money market mutual instruments, it is NOT MANDATORY FOR THEM. They can play with whatever they wish. YOU CAN’T QUESTION IT.

Take the recent cases of Ultra Short Term Debt Funds. Many investors invested in these funds as if they are safer than other categories of funds as the fund manager has the mandate to invest in 3-6 months Macaulay duration. However, as SEBI is silent on credit quality or credit risk, few fund managers invested in junk papers just to generate alpha for the investors. The result is to known to all of us now.

# SEBI is silent on Maturity:- As SEBI has given a freehand to the fund manager to invest 80% of your money in various maturity periods of Gsecs, you are unknown of the fact that whether the fund manager is investing in 5 years Gsec or 10 Years GSec. The fund manager may churn the portfolio as per his wish. If his call to churn the portfolio goes good, then you are lucky. Otherwise, you have to bear the heat.

Hence, Gilt Mutual Funds acts like a typical Dynamic Bond Funds but with the restriction of GSec.

# Highly sensitive to interest rate movement:- As I pointed above, Gilt Mutual Funds may protect you from default or downgrade risk. However, Gilt Funds may not protect you from interest rate movements. Especially, if your fund manager is holding the long term maturing Gsecs, then obviously the volatility to your portfolio is high.

# They too can give you NEGATIVE returns:- As I told you, Gilt Mutual Funds can also give you negative returns if fund manager call goes against the tide. To showcase this, I have selected 3 Gilt Funds that are there currently in the market. I have selected these 3 only just because they have higher AUM. Let us understand the performance of these funds.

The below image is for a 1 Yr Rolling Return for 10 years period.

Notice the volatility. The highest return was around 23%. However, there is a negative 4% return from ICICI. Also, the average return is around 9%.

The below image is for a 1 Yr Rolling Return for 5 years period.

Gilt Mutual Funds are Safe 5 Yrs returns

Notice the volatility in return. Among the three funds, the maximum return was by ICICI (21%). However, there is a minimum return of -1.62% by SBI. The average returns stand by around 9%. However, it does not mean you can expect the same in future also.

But still one may go by the average return of around 9%. But do remember that these funds performed well because the interest rate is falling continuously from what it was maybe 10 years or 5 years away. Expecting the same in future is at your RISK 🙂

Conclusion:-Considering all these aspects, don’t think Gilt Mutual Funds are really safe heaven. Instead, they are also volatile, and also there may be certain risks in such funds. Hence, take a conscious call by understanding the risk involved. Use such Gilt Mutual Funds only if you can sustain the risk or your goals are really long terms like more than 10 years or so.

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8 Responses

  1. I want to know a few things. We will be greatfull if you clear our doubts.
    Where do the overnight and liquid funds investment the money?
    Do they invest 80% of the money in govt bonds as is the case with gilt funds?
    On what basis you are suggesting overnight and liquid funds in an earlier blogpost ( is it only because they have less interest rate risk but they are having higher counterparty risk right if they don’t invest in govt secs)?

    1. Dear Sudha,
      In case of debt fund, the risk will increase slowly as the average maturity of the fund manager’s portfolio increases. Hence, in case of overnight and liquid funds, the time horizon of maturity is less, they are safe compared to other categories. However, it does not mean they are safe. Around 2017, one Liquid Fund fell by around 9% in a single day. If you don’t know what you are doing, everything is risky.

    1. Can we do manual sip in gilt fund to minimise risk i.e when gilt fund falls we can buy more like sip

      1. Dear Manoj,
        You can do manual SIP not only in these categories but in all Mutual Funds. However, whether it minimises the risk or not only god knows. The reason is that, how can you define that the current FALL is the real fall and it will not fall further?

  2. Dear Basu,

    Great anylysis. This question of Gilt funds was haunting me for a long period.

    Now it’s settled.

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