From the debt funds in our market, the short-term gilt funds have been top performers and specifically, the Sundaram Gilt fund which gave 19 per cent returns over the last 1 year. How has this fund managed to give such high returns in comparison to other funds in the category? How should we choose a gilt fund? Is past performance a fair indicator?
-Archit Jain
You should not get carried away with the impressive returns of Sundaram Gilt fund. We say this because the fund is not a part of the mainstream categories of funds, and it is only a Rs 20 crore fund. Gilt funds invest in government securities which have a large and active market. Any changes in the interest rate outlook get dramatically reflected in a gilt fund. The returns from the fund could be an accident due to small asset base, which may not be true in times to come.
These funds are a good bet when you have a view on interest rates. Whenever the rates go down, long-term bond funds benefit and gilt funds reflect these changes.
When FIIs pulled out investments in June, being a Rs 20 crore fund, this fund could reduce its maturity quickly and escape the big decline that affected other larger gilt funds. Gilt funds are not exposed to credit risk.
Past performance does indicate how a fund navigates through volatile markets and this fund has been impressive. But gilt funds can be very volatile as government securities happen to be the most volatile segment of the bond market given their long maturity and a very active and large participant base.
This article was originally published on December 17, 2013.
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