IDFC Government Securities - Investment Plan: Buy :: Business Line

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This fund has made the most of low rates while capping losses when rates moved up

Gilt funds, which took a knock in July-August last year, have made a strong comeback since then. Top performing schemes have delivered 14-17 per cent returns in the last one year due to favourable election results and the resultant economic recovery. Investors willing to take moderate risks can now invest in gilt funds that offer a good entry point.

IDFC Government Securities Investment Plan has been a steady performer in the gilt funds category, delivering 11.6 per cent annual return over the last three years. The fund has outperformed its benchmark, I-Sec Composite, across cycles.

The last rate increase by the Reserve Bank of India (RBI) came in January 2014, after which it has kept key policy rates unchanged. Also, the market is now factoring in a rate cut in the next six months, as a result of which the yields on 10-year G-Secs have come down from 8.6-8.7 per cent to 8.2 per cent levels as bond prices rallied.

With the core CPI inflation now trending lower for the second month in a row, the RBI is expected to oblige market expectations with a rate cut, in the next six months.

However, given that risks are high with gilt funds, investors should opt for funds with a consistent track record and performance across rate cycles.

Steady performer

IDFC Government Securities Investment Plan has delivered 12.5 per cent returns over the last one year. The fund has made the best of downward rate cycles such as during July 2008-April 2009 and April 2012-May 2013, clocking 18-20 per cent during these periods. It has also managed to cap losses when interest rates moved up.

When the RBI suddenly hiked interest rates last year, the fund lost 4 per cent in the May-August period, lower than the 6-8 per cent losses most funds incurred during this period.

Active duration

Gilt funds that mainly invest in long-term Government securities have no credit risk. But they carry interest rate risks. Hence, funds that manage the duration of the fund actively can cope with this risk better.

IDFC Government Securities Investment Plan has always managed duration actively. In the beginning of 2013, the fund reduced its duration from seven to two-five years, when it was felt that there was limited room for further rate cut. This helped it cap losses during the July-August period when rates spiked. The fund also took an active call and increased the duration from June this year, which helped it gain 6 per cent in the last five months, as yields on 10-year G-Secs started to trend lower at a quick pace.