[DigitalOne]

Originally Posted by SmartCat

Unlikely. But can happen if:

- Indian inflation cools down because of the above

I read that even if Inflation in India cools down RBI will still be forced to increase the interest rate at least a couple of times this calendar year. Fed is expected to increase the US interest rate and hence RBI will have no other option than to hike interest rate. This is to arrest the slide in rupee against the dollar. So we are no where close to peak interest rate.

As as aside, Oil and other commodity prices have already started crashing anticipating a US recession.

No. The fund manager will buy government bonds of higher maturity. For example: if a fund has 3 bonds maturing in 2023/2024/2025, after one year, he will have bonds maturing in 2024/2025/2026.

The question was about Target maturity funds and not constant maturity funds. Anyway, I got my answer while reading this article about these kind of funds. If I remember right these new type of Gilt funds have been just introduced in the last 1 year, and most have bond target maturities around 2027, 2028.

These schemes have a defined maturity and passively invest in bonds of similar maturity, constituting the fund's benchmark index and giving visibility of returns. On maturity of the fund, investors are returned their investment proceeds. Since they are open-ended, there is intermittent liquidity and investors can buy and sell at NAV. They have high-quality portfolios consisting of G secs, PSU bonds and state development loans (SDLs), all of which carry low credit risk. The expense ratio is 15-20 ..

[Saanil]

Originally Posted by DigitalOne

Is there a short-term opportunity to get a 10-11% return in 1 year from Gilt funds?

I do not think you should annualize the monthly returns given by gilt funds in the past 1 month. In the long term (>10 years), I expect gilt funds to return 7-9% on an average. Of course I would be happy if I get more. You can check how much gilt funds have returned in the past 10 years to get an idea about future potential returns (assuming stable environment).

[DigitalOne]

Originally Posted by DigitalOne

The last 1-month returns are higher in the Target maturity funds (Example 1, 2 ). Another opportunity?

Are there some risks that I am not seeing?

Originally Posted by Saanil

I do not think you should annualize the monthly returns given by gilt funds in the past 1 month.

Took the plunge and moved a couple of lakhs to DSP fund with target maturity in 2028. The YTM is 7.48%. So even if my expectations of a quick 1-year return is not met, I can expect a 7.48 CAGR by 2028. I don't need the money anytime soon.

The only worry is if any of our Indian states go the Sri Lanka way and the issued State Development Loans become junk. I think the SDLs are not counter-guaranteed by the central government.

[SmartCat]

Originally Posted by DigitalOne

The only worry is if any of our Indian states go the Sri Lanka way and the issued State Development Loans become junk. I think the SDLs are not counter-guaranteed by the central government.

Interesting question, so did a Google search.
https://mf.nipponindiaim.com/knowled...velopment-loan



RBI has powers to ensure that SDL bond holders are paid from center's allocation of funds to states. In addition to that, RBI maintains a fund to pay off SDL bond holders in case of default.

[saket77]

Originally Posted by DigitalOne

The only worry is if any of our Indian states go the Sri Lanka way and the issued State Development Loans become junk. I think the SDLs are not counter-guaranteed by the central government.

SDLs or State Development Loans have sovereign guarantee, so you can say that the RBI/ Center will not let them go junk even in case of any default.

Though, there have been defaults of Madhya Pradesh, Uttar Pradesh, Bihar, Punjab and Orissa state PSU bonds defaulting during the early 2000s but the bonds were restructured and subsequently honored. You can also check this page on RBI's website for clarification:
https://www.rbi.org.in/Scripts/FAQView.aspx?Id=79

Regards,
Saket

[Lalvaz]

Need some advice. I invested in SBI Dynamic Bond Fund in Feb 2021. My expectation was that this would grow at 7-8% per annum, which is fine with me. Now, the fund has till date given me only 4.8% returns, which means annual returns are a little less than 3%. I'm aware that the last few years have not been good for debt funds, but these returns are lower than some SB accounts. I don't need the funds at this time, but was wondering if I should continue or switch. In case of switching, any recommendations?

[Linuskm]

Originally Posted by Lalvaz

Need some advice. I invested in SBI Dynamic Bond Fund in Feb 2021. My expectation was that this would grow at 7-8% per annum, which is fine with me. Now, the fund has till date given me only 4.8% returns, which means annual returns are a little less than 3%. I'm aware that the last few years have not been good for debt funds, but these returns are lower than some SB accounts. I don't need the funds at this time, but was wondering if I should continue or switch. In case of switching, any recommendations?

If you are still in middle age like 30s would recommend equity funds preferably index funds which should give 10+% yrly returns in 3-5 yr timeframe, if you want to go little slow prefer balanced funds. Debt funds are not a good investment in my opinion both from growth and taxation point of view.

[SmartCat]

Originally Posted by Lalvaz

Need some advice. I invested in SBI Dynamic Bond Fund in Feb 2021. My expectation was that this would grow at 7-8% per annum, which is fine with me. Now, the fund has till date given me only 4.8% returns, which means annual returns are a little less than 3%. I'm aware that the last few years have not been good for debt funds, but these returns are lower than some SB accounts. I don't need the funds at this time, but was wondering if I should continue or switch. In case of switching, any recommendations?

Go through the first 2 or 3 pages of this thread to have a better understanding of debt funds.

My quick analysis of SBI Dynamic Bond Fund:
https://www.valueresearchonline.com/...mic-bond-fund/



The fund manager has put 60% of funds in "Cash Equivalent". This is basically as good as keeping money in a savings account (overnight securities, if you want me to be a bit more technical). That's why you got 3% ish returns so far.

That's because the fund manager expects the interest rates to rise. Your future returns from this fund will depend on how good the fund manager is in predicting interest rates. Historically, the fund has returned around 8% pa which is OK.



But the expense ratio of 0.8% for 'direct' investment is a bit on the higher side. If you are investing using a traditional investing platform (regular fund), the expense ratio is 1.6% (which is insanely expensive)

[Lalvaz]

Thanks Smartcat, Interesting to see the high expense ratio inspite of a poor performance. I've put in a redemption request. Now to decide where to invest.

[k_kumar]

Originally Posted by SmartCat

Go through the first 2 or 3 pages of this thread to have a better understanding of debt funds.

I think the expectation of getting current yield to maturity (YTM) over the current average maturity (AM) period only holds for fixed/target maturity funds and to some extent for funds that follow rolldown strategy. The interest rate risk will always be there as long as the fund runs some duration.

Let's consider a hypothetical fund that maintains a modified duration (MD) of about 1 year and does not charge any fee. Its current AM is 1 year and YTM is 6%. Let's say its NAV today is Rs 100. There is no interest rate change over the next 364 days and the NAV is near 106 in Oct 2023. Then RBI increases policy rate by 50 basis points. The next day the NAV falls to 105.47. You sell the fund after holding it for one uneventful year (no default) and get 5.47% return instead of 6%.

Now let's see some real life examples.

Here are the quants for Axis Banking and PSU fund as of Dec 31, 2019.

Average Maturity: 2.4 years
Modified Duration: 2.1
Macaulay Duration: 2.2 years
Yield to Maturity: 6.79%
Expense Ratio: Regular / Direct 0.59% / 0.29%

Someone investing in the above fund on Dec 31, 2019 would expect to get about 6.5% in the next 2.4 years. Till Mar 2022 the fund was on track to fulfil this investor's expectation returning 6.47%. Then came the rate hike and the fund finally managed to return 6.05% over the 2.4-year holding period ending on May 31, 2022.

The impact of rate hike was not much since the fund rolled down its MD to 0.71 by that time. However, the effect was more severe for SBI Short Term fund that maintained longer duration (MD 1.21 as of Mar 31, 2022).

Quantitative data of the fund as of Sep 30, 2019 were as follows:

Average Maturity: 3.02 years
Modified Duration: 2.38
Yield to Maturity: 7.36%
Expense Ratio: Regular / Direct 0.84% / 0.34%.

So, one would expect about 7% annualized return over the next 3 years. Till Mar 2022 the fund returned 6.77% but at the end of the 3-year holding period on Sep 30, 2022, the return was 6% only.

Sources of data: Portfolio quants from monthly factsheets available in Axis MF and SBI MF websites. Point to point returns from moneycontrol.com.

[SmartCat]

Originally Posted by k_kumar

. The interest rate risk will always be there as long as the fund runs some duration. The next day the NAV falls to 105.47. You sell the fund after holding it for one uneventful year (no default) and get 5.47% return instead of 6%.

From your own example, we can see that the 'risk' is minor. Compared to your example, the actual risk or reward can be significantly higher if the holding period is lower. This is best/worst returns of the Axis Banking & PSU fund:



So the yield to maturity and average maturity gives a rough idea about returns. If the displayed yield to maturity at 6.7%, it doesn't mean an investor will get exactly 6.7%, down to the decimal point.

After all, over the period of 2 to 3 years, the fund manager is likely to shuffle his portfolio too. He might sell overpriced bonds and buy underpriced bonds. So an investor at entry might see YTM of 7% and average maturity of 3 years. But after a few months, both the numbers might have changed, even if there is no interest rate change.

[k_kumar]

Originally Posted by SmartCat

From your own example, we can see that the 'risk' is minor.
...
If the displayed yield to maturity at 6.7%, it doesn't mean an investor will get exactly 6.7%, down to the decimal point.
...
After all, over the period of 2 to 3 years, the fund manager is likely to shuffle his portfolio too.

I totally understand your points. In my hypothetical fund example the risk was minor because the duration was 1. Had it been 2 or if RBI were more aggressive, then the risk would have been greater. I also understand that the fund manager is likely to shuffle the portfolio and that's why I mentioned about the rolldown strategy in the opening sentence. Sure, the actual YTM that an investor gets over the average maturity (at the time of entry) period won't be an exact match with the "expected" YTM, but ultimately getting 1 or 2 percentage points less due to rising interest rates might be unsettling for fixed income investors.

I decided to write the previous post since I felt that you downplayed the interest rate risk in your posts, especially in the second post in this thread (quoted below). I hope that my explanations complement your numerous insightful posts and help debt fund investors make informed decisions.

Originally Posted by SmartCat

Interest rate risk in debt funds is basically "volatility risk". That is, NAV of this fund can go up and down depending on fall/rise in short term (up to 2 yr) interest rates. But if you hold for 2 years, there is a guarantee of 4.5% per annum returns (assuming there are no defaults) in this particular fund. By design, the NAV will recover to the published yield to maturity % levels after 1.9 years. That's because interest will be accrued on the bonds over time, pushing up the NAV.

[green_ninja]

Has anyone invested in GOI treasury bills through ICICI Direct? How does it work? I just bought some at the last auction on Nov 16th. Face value is 100 and discounted price is 96.xx yielding ~6.64%PA. But ICICI charged me 100 and I will get back 100 after 182 days. Isn't that a loss? Or am I missing something here?

[green_ninja]

Originally Posted by green_ninja

Has anyone invested in GOI treasury bills through ICICI Direct? How does it work? I just bought some at the last auction on Nov 16th. Face value is 100 and discounted price is 96.xx yielding ~6.64%PA. But ICICI charged me 100 and I will get back 100 after 182 days. Isn't that a loss? Or am I missing something here?

Apologies for the back to back posts as it is too late to edit the original post.

Update to my question - ICICI did refund the difference between the Face Value and Discounted Value minus their commission. It just took a few days.

[thanixravindran]

Originally Posted by green_ninja

Apologies for the back to back posts as it is too late to edit the original post.

Update to my question - ICICI did refund the difference between the Face Value and Discounted Value minus their commission. It just took a few days.

Is it not possible to do it directly with RBI retail?