Gilt funds are debt mutual funds that invest in G-secs, often known as government securities. These funds must invest 80% of their capital in government securities in order to comply with SEBI regulations. As a result, they have low credit risk, however, they are extremely sensitive to interest rate changes.
The bond prices and yields move in opposite directions. Bond prices decline when rates rise, which drags down the NAVs of debt schemes. Does that mean you should not invest in these schemes? Not really. For example, the interest rates may go up and the trend may last for a year or two. After that interest rate may start falling, which is beneficial for gilt funds. These schemes offer optimal returns when rates start falling or in anticipation of interest rate falls.
Despite the rising interest rate environment, net inflows from investors have been witnessed in gilt schemes and gilt with 10-year constant maturity schemes, both of which have exposure to long-term bonds. Gilt funds with 10-year constant maturity are mutual fund schemes that invest in government securities in such a manner that the average maturity stands at 10 years. Investors looking for a high coupon and possible capital gains over the medium term are looking at investing in gilt funds and gilt funds with 10-year constant maturity schemes.
UTI Mutual Fund has launched UTI Gilt Fund with 10 Year Constant Duration. It is an open-ended debt scheme investing in government securities having a constant maturity of 10 years. Relatively High Interest rate risk and Relatively Low Credit Risk.
On the launch of this fund, Mr Anurag Mittal, EVP & Deputy Head of Fixed Income at UTI AMC Ltd., said, “Aiming to offer new investment opportunities via varied products, our latest fund launch, UTI Gilt Fund with 10 year Constant Duration, is a suitable offering for strategic allocation in a duration fund with sovereign exposures in the UTI Mutual Fund product suite. While diversified allocation to different asset classes like equity, fixed income & gold has become an adage for investors, sovereign allocation within fixed income can offer a better value proposition by minimising credit risk, providing high liquidity while maintaining tax efficiency needs to be given more consideration.”
Table 1: Details of UTI Gilt Fund with 10 Year Constant Duration
| Type | An open ended debt scheme investing in government securities having a constant maturity of 10 years. Relatively High Interest rate risk and Relatively Low Credit Risk. | Category | Debt Scheme – Gilt Fund |
| Investment Objective | The investment objective of the scheme is to generate optimal returns with high liquidity by investing in a portfolio of government securities such that weighted average portfolio maturity is around 10 years. However there can be no assurance that the investment objective of the Scheme will be achieved. The Scheme does not guarantee / indicate any returns. |
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| Min. Investment | Rs 5000/- and in multiples of Re 1 thereafter. Additional Purchase Rs 1000/- and in multiples of Re 1 thereafter. | Face Value | Rs 10/- per unit |
| Plans |
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Options |
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| SIP/SWP/STP | Available | ||
| Entry Load | Not Applicable | Exit Load | Nil |
| Fund Manager | Mr Anurag Mittal | Benchmark Index | CRISIL 10 Year Gilt Index |
| Issue Opens: | July 18, 2022 | Issue Closes: | July 26, 2022 |
(Source: Scheme Information Document)
The investment strategy for UTI Gilt Fund with 10 Year Constant Duration will be as follows:
UTI Gilt Fund with 10 Year Constant Duration would invest minimum of 80% of the total assets in securities issued by the Central Government and/or State Government, with the aim to generate optimal returns with high liquidity such that the weighted average portfolio maturity is around 10 years.
The corpus of the scheme can be invested in any (but not exclusively) of the following securities:
- Fixed Income Securities of domestic government agencies and statutory bodies
- Securities issued by the Central and State Governments
- Triparty Repos on Government Securities or treasury bill, Reverse repo in Government Securities, Cash and Cash Equivalent, Money market instruments permitted by SEBI/RBI
- Derivative instruments like Interest Rate Swaps, Forward Rate Agreements, Interest Rate Derivatives and such other derivative instruments permitted by SEBI/RBI
- Pending deployment of funds, in short term deposits with Scheduled Commercial banks
The securities mentioned above could be listed or unlisted, secured or unsecured, rated or unrated and of varying maturity. The securities may be acquired through Initial Public Offerings (IPOs), secondary market operations, private placement, rights offer or negotiated deals. The fund manager would endeavour to optimize portfolio turnover to maximize gains and minimize risks keeping in mind the cost and overall scheme objective.
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation for UTI Gilt Fund with 10 Year Constant Duration
| Instruments | Indicative Allocation (% of net assets) | Risk Profile | |
| Minimum | Maximum | High/Medium/Low | |
| Securities issued by the Central and State Governments | 80 | 100 | Low to Medium |
| Triparty Repos on Government Securities or treasury bill, Repo, Reverse Repo on Government Securities & Money Market instruments | 0 | 20 | Medium to High |
*The Scheme may also take exposure to: Derivatives up to 50% of the net assets of the Scheme.
(Source: Scheme Information Document)
Who will manage UTI Gilt Fund with 10 Year Constant Duration?
The designated fund manager for this scheme is Mr Anurag Mittal. He is a CA, B. Com (Hons), MSc in Accounting & Finance, LSE, UK and has 15 years of experience in the field of Fund Management, Dealing and Research. Prior to joining UTI AMC Ltd., he has been associated with IDFC Asset Management Co Ltd. as Senior Fund Manager, with HDFC Asset Management Company Ltd, Axis Asset Management Company Limited, ICICI Prudential Life Insurance and Bank of America.
At UTI AMC Ltd., Mr Mittal currently manages, UTI Banking & PSU Debt Fund, UTI Money Market Fund, UTI Treasury Advantage Fund and UTI Corporate Bond Fund.
Fund Outlook – UTI Gilt Fund with 10 Year Constant Duration
UTI Gilt Fund with 10 Year Constant Duration will predominantly invest in sovereign securities issued by central and state governments, with the aim to generate optimal returns with high liquidity, such that the weighted average portfolio maturity is around 10 years.
Since there is no lock-in time and the scheme aims to invest in the most liquid and sovereign rated government securities, it provides high liquidity as needed. Due to the portfolio’s sovereign design, it has a low credit risk. If assets are kept for 36 months or more, it also offers Long Term Capital Gain with Indexation Benefit.
The investment strategy endeavours to invest in government securities, which have low credit risk and offer comparatively higher yields than the majority of other fixed income investments with comparable risk profiles. Debt funds suffer from the current climate of rising rates. However, because inflation is caused by supply side reasons rather than demand side factors, the RBI will find it challenging to hike rates further. Additionally, hiking rates further will hamper the economic growth and the RBI may eventually be restricted at a certain point to raise rates.
This should ensure a limited upside to bond yields, as the market tends to discount the future well in advance. Bond prices decrease when interest rates rise and vice versa. Investors who purchase gilt funds with a 10-year constant maturity could see respectable gains over the long term if interest rates do not significantly rise or change in either direction before declining from their peak.
Although this may sound like a high return potential investment, do not ignore the risks. It is difficult to predict when bond yields will peak. In case there are adverse developments such as a worsening geo-political scenario, rising inflation and a massive increase in government borrowings, bond yields can go up further and, in that case, investments in long-duration products will suffer. These factors among others, may have an adverse impact on the scheme’s performance.
Thus, this scheme is suitable for investors looking to build high quality debt portfolio with moderate to high risk appetite and a long investment horizon that aligns with the fund’s portfolio duration.
This article first appeared on PersonalFN here
