SBI Magnum Gilt Fund: Buy :: Business Line

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The fund has actively managed its tenure in tune with the market

After ruling high for more than a year, interest rates are expected to soften this year. The RBI, in its December policy, has also indicated a rate cut early this year, which opens up a good opportunity for fixed income investors.

Investors willing to take a longer view can invest in gilt funds.

SBI Magnum Gilt Fund-Long Term, fits the bill as it has outperformed its benchmark over one-, three- and five-year timeframes. It has delivered a compounded annual return of 11.5 per cent over the last three years.

Yields on the 10-year G-sec have declined by more than 100 basis points in the last one year. Top-performing gilt funds have delivered 19-20 per cent returns in the last one year, cashing in on the bond rally.

But this is only the beginning of a downward rate cycle.

SBI Magnum Gilt Fund was one of the top-performing funds in 2014, clocking about 20 per cent returns. It has delivered consistent performance by actively managing the duration of the fund.

Playing catch-up

There have been bouts of underperformance from the scheme as well. For instance, the fund missed out on the rally during the July 2008-April 2009 downward rate cycle, and delivered 5.8 per cent returns when top-performing funds clocked more than 20 per cent returns.

But in the last two years, the fund has been able to compensate for the lapse, delivering 12 per cent annualised returns.

Between April 2012 and May 2013, as the repo rate fell 125 basis points, the fund delivered a healthy 19.3 per cent return on a par with other top-performing funds in the category.

Gilt funds can take a beating when interest rates move up and also rake in huge gains when rates fall. So, funds manage the interest rate risk by altering the duration of the fund.

Duration management

SBI Magnum Gilt Fund-Long Term has actively managed its duration. Coming out of the sharp decline in rates in March 2010, the fund had reduced its duration to less than one year and maintained an average duration of about three years through the rate hike cycle until October 2011.

During the April 2012-May 2013 down rate cycle, the fund had upped its duration to an average of 6.5 years to cash in on the bond rally. Now, betting on a rate cut in the next 12-18 months, the fund has once again increased its duration to 8.7 years.

This is likely to help it cash in on rising bond prices.