Short-term Gilt Funds: Superior Returns

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: The best way to describe short-term gilt funds is simple: no credit risks and low susceptibility to interest rate changes. Short-maturity government securities (gilts) and treasury bills (T-bills) comprise this category’s asset basket. As debt markets have been volatile, short-term gilt funds have been much less-affected than their longer-term debt peers. Although this category has gained just 2.22 per cent year-to-date through April 17, 2003, it has done much better than its long-term peers as well as income funds. An average medium-to-long-term gilt fund gained 1.75 per cent while an average income fund was up 1.30 per cent.

If we compare the performance of the two categories over one-month and three-month periods, the results that thrown up are quite varied. Over one month-ended April 17, 2003, the medium-to-long-term gilt funds topped the charts with a 3.76 per cent gain while short-term gilt funds were up a mere 1.86 per cent. Over the three-month period, the latter scored 1.69 per cent while medium-to-long term gilt funds turned in a 0.54 per cent return. However, over the one-year period, longer-tenure gilt funds have given best returns among all fund categories.

The reasons for short-term gilt funds’ outperformance are not really that tough to find. These funds invest in government securities (gilts) with short-maturity profile and, hence, a change in interest rates has little impact on the market price of these instruments. In contrast, longer-maturity gilts respond more actively to interest rate changes. And in 2003 so far, medium-to-long maturity gilts have witnessed high volatility.

Consider this: the yield on the most actively-traded 10-year gilt (GOI 2013, 9.81 per cent), has seen the most fluctuation-between 5.85 per cent and 6.76 per cent. On the other hand, the yield on short-maturity gilt (GOI 2005 11.19 per cent) has ranged in 5.39 per cent to 6.17 per cent. However, in the past one month, expectations of a bank rate cut have seen long-tenure gilts generate superior returns. A reason for volatility could also be the standard deviation of long-term and short-term gilt funds. While the standard deviation of long-term gilt funds ranges between 0.34 and 1.43, in the case of short-term gilt funds it hovers in the 0.16-0.34 range.