Must gilts be a core holding?

By Kaustubh Belapurkar |  17-12-20 | 
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About the Author
Kaustubh Belapurkar, Director of Manager Research, Morningstar Investment Adviser India.

I have two portfolios, each with a very focused aim. In both I have a 70:30 allocation to equity and debt, respective. 

Portfolio I: This is for my child’s education which is 20 years down the road. The funds are ICICI Multi Asset (40%), ICICI NN50 (40%), Motilal Oswal S&P 500 (20%) and SBI Const Gilt (100%). 

Portfolio II: This is my retirement kitty, 30 years ahead. The funds are Canara Equity Hybrid (40%), UTI NN50 (40%), Motilal Oswal Nasdaq 100 (20%) and EPF & IDFC Gilt (100%).

It is good to see how you have segregated the two goals and have portfolios for each.

You are investing up to 40% in equity hybrid funds. These funds typically hold 75% in equities and 25% in other asset classes like fixed income and/or gold. So effectively your overall portfolio equity allocation is 63%.

  • Recommendation: Given your investment time horizon of 20 & 30 years, we recommend that you can take on some additional risk by increasing overall equity allocation to 80%. This will help you build a larger corpus over time.

While investing in an index fund is a great way to take equity exposure, we think you are overexposing yourself to the NIFTY Next 50 companies. While over the longer term the NIFTY Next 50 has delivered higher return, it has come at the cost of greater volatility and larger downsides. See below charts.

  • Recommendation: Split this exposure to 20% in a NIFTY/Sensex Index Fund and 20% in a NIFTY Next 50 Index Fund. This will create a more balanced index fund exposure.

While there is no credit risk associated with gilt funds, there is a fair bit of interest rate risk in these funds. As interest rates move up, there can be a significant negative mark to market (MTM) impact on the NAVs of these funds. There have been periods of negative returns on gilt funds due to interest rates rising. The most recent case was in 2017, post which yields have trended lower albeit with some volatility. See below chart.

  • Recommendation: Build a core holding of Corporate Bond and Short Duration Funds and taking some exposure to Gilt funds. This can be done in a 75%:25% proportion.

NIFTY 50 Index


NIFTY Next 50 Index 

Gilt funds and interest rates

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ninan joseph
Dec 20 2020 06:22 PM
 Investing in Index Funds is not GREAT when you have option to invest in Index ETF. SBI Nifty 50 etf has an AUM of 73,000 crore and the commission they charge is 0.7%. Do not go for Index investing using the MF route.
Second by investing in Nifty 50 and Nifty next 50, you are basically covering 100 top notch companies of India. This also covers bank index as all of the banks which are mentioned in bank index will be covered in these two ETF. You have a long time to go. Hence ETF i.e only Nifty 50 or Nifty next 50 or Bank Nifty is the only option. Do not go for Gold and other so called ETFs.
In 2007 nifty was 7500. Today it is 13600. Another ten years down the line, nifty will be 25,000. Your money is to a great extent protected.

With regard to Gilts, interest rate factor is an issue if you are a short term investor. However, if you are a long term investor for children education etc, then these interest rate volatility does not matter. You can safetly invest. Again NPS is a beautiful product which covers Gilts. Just invest in this.
ninan joseph
Dec 20 2020 06:14 PM
 Under the retirement corpus, just include NPS. NPS is a wholesome meal so to speak. It has equity, corporate bonds and Gilts. Hence your preference will be taken care off. NPS is a finest of products. When the market crashed and when I checked my NPS, the return was negative by 0.5%. This was because of bonds and gilts. Under your retirement portfolio, include NPS. This will cover all. The commission they charge is negligible.
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