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Fixed Income

Gilt Fund – Getting out half – yield at 7.18%

I’ve been holding on to the gilt fund for a while and I’m sick of it – the yields are going up and prices are falling. At 7.18% it’s the lowest I’ve seen for a while, and I am getting out of half my position. Why am I leaving half in there? Just a feeling there’s going to be a better time in the next week.

I’ve made a miserable 4% gain in about 9 months – nothing to write home about. Luckily I won’t pay any taxes on it – all of the money has come in as dividend.

Last week, the auction of 12,000 cr. devolved on primary dealers – meaning, not all of it was subscribed. 285 cr. of a 7 year bond and 630 cr. of a 11 year bond didn’t get subscribed. A lot of bond sales have happened by the RBI lately, like most other governments, and the spirit is to sell even more while the going is good. Well, the going doesn’t seem to be as good anymore.

What will be interesting is the impact of a bad monsoon on yields – with even lower revenues from the after effects of a bad monsoon, the deficit balloons further. At some point we will need to monetize it – meaning, the RBI will buy bonds directly (or, like in the US, slightly indirectly). Monetization breeds inflation – a fear that is currently not on the radar.

Still, this is all the expected result – nearly everyone in the market thinks of the deficit monetization as a conclusion. Yet, I’ve seen markets behave in really odd ways – will there be something different this time? Time will tell.

But I’m getting out when I still have a profit; hopefully it won’t make me regret it by turning around right now!

  • Anonymous says:

    >Hi Deepak,

    How do you invest in GILT funds?

    I invest through ICICIDirect. Any idea if I can invest through that?

    mkd

  • Anonymous says:

    >U should also look at the opportunity loss in the trade. In the intermittent period equity markets have delivered a 30-40% return if not more. If i remember u r call was equities were going down and u were looking at gilts betting at interest rates going down.

    4% could be absolute gain but peg it with inflation and u have lost money.

    Also why 50% kept for next week. Hope is a bad thing for a trader. U r hoping something will change next week. Never run a trade on hope, thats when u lose the plot.

  • Deepak Shenoy says:

    >Anon1: No Idea about ICICI direct but surely you can buy gilt funds from them?

    Anon2: Good points, and humbling thought. Equity has returned far more and I have not invested or traded in equity for the last few months, so as a trader it's a huge opportunity lost.

    Not looking at inflation – my expenses have actually come down and I've upgraded my lifestyle, so that's not much of a factor.

    50% for next week – it's only to stave off a short term blip, like a pyramid out. But you're proved right, the yields soared to 7.3% today! Usually mid week stability ensues, so I'll choose one of the days to exit – I know I'm behaving very differently from my trading days, I wonder why.

  • Sridhar Raghavan says:

    >@Anon1: Yes, you can invest in gilt funds through ICICIDirect. I would like to caution though that it is best to verify the exit load on the schemes at the mutual fund website. I have found differences in the entry/exit load as mentioned on ICICI.

    @Deepak/Anon2, I assume that both of you are looking a gilt funds as a trading opportunity. But for an investor who wants to invest a portion of his portfolio in debt, isn't a gilt yield of 7.3 a good time to be invested?

  • GG says:

    >I am completely novice as far as the Indian Govt. debt market is concerned. Is there any site you can recommend? What are the good gilt funds in India, you think? (Don't worry – I know this is not investment advice ;-)) BTW, which gilt fund are you referring to here? Also, is there any way to go short the Govt. bonds in India, kinda like the US Treasury bonds (via ETF's)?