It always pays to diversify. And when we looked at the category of gilt funds and gold ETFs, it was clearly apparent.
Gold ETFs posted a one-month return of 19.38% (as on Feb 18, 2009). On the contrary, gilt funds were down by 4%.
Gold ETFs benefitted from the price of gold which recently has been climbing. On the other hand, gilt funds invest in long dated securities issued by the Government of India and are very sensitive to the interest rate scenario. As the yield of the 10 year benchmark paper rose from 5.25% (Dec 31, 2008) to 6.45% (Feb 18, 2009), the price of the most traded 10-year bonds was down by 8%.
In 2008, both these categories did fairly well. In fact, gold ETFs (25.04%) and gilt funds (24.94%) were the top performers. But during the year, their returns varied significantly.
In the first quarter of 2008 (Jan-Mar), the stock market lost 25% from its peak in January 8. Rising inflation and the weakening dollar saw the price of gold rise, which benefitted gold ETFs. On the other hand, the interest rate began to rise and the yield of the 10-year benchmark paper too rose. This resulted in bond prices falling and gilt funds managed to generate only 1.20% return in comparison to gold ETF’s 13.40%.
The last quarter of 2008 saw a reversal. With a fall in inflation as well as a falling interest rate scenario, bond prices moved upward. The returns of gilt funds jumped from 2.30% (3rd quarter) to 20.68% in the last quarter (Oct-Dec) while the return of Gold ETFs fell from 4.26% to -0.38%.
Last week, the price of gold moved up. Interest rates are definitely on the way down. All this will once again have a bearing on the performance of these two fund categories.
Gold ETFs: Category of Gold Exchange Traded Funds
Gilt Funds: Category of Gilt Medium and Long Term Funds