All that you want to know about Gilt Funds - Swapnil Suvarna

Gilt funds predominantly invest in government securities (G-Sec) issued by the RBI on behalf of the government of India. This variant of debt fund invests only in government bonds unlike other debt funds which invest in debt instruments across the board. Since, G-Sec market is primarily dominated by institutional investors, gilt funds gives an opportunity for retail investors to participate in the bond market. Gilt funds are available for short-, medium- and long-term.

Risk involved in gilt funds

Though sovereign papers do not expose investors to credit risk, gilt funds does not guarantee returns like bank fixed deposits, saving accounts and small savings fund. The performance of these funds is affected by events like RBI monetary policy, supply/maturity of government debts, inflation & inflationary outlook, economic growth outlook, deposit/credit growth and global bond yields. Moreover, these funds invests in G-Secs which are not actively traded i.e. highly illiquid.

Who can invest?

Gilt funds are ideal for those clients of yours who are risk averse and at the same time expect to generate reasonable returns on their investment amount.

When should one invest?

An ideal time to invest in these funds is when interest rates are expected to peak, because there is an inverse relationship between the price of the G-Sec and interest rates. Bond yields and interest rates move in the same direction whereas the bond prices move in the opposite track. A fall in the interest rate leads to a rise in the bond prices as well as the NAV of the gilt fund or vice-versa. Also, longer the duration of the securities/portfolio higher will be the capital appreciation or vice-versa.

Current Scenario

Now that the benchmark yield have peaked out of 8.97% in November to below 8.50% levels in December 2011 following signs of easing inflation and hopes of a pause to the RBI rate hike, one can consider investing in gilt funds. However, given that we are expecting an economic slowdown, the performance of the funds in the near term would depend on the fund manager’s ability to aggressively manage duration and generate reasonable capital gains. The benchmark 10-Year government bond yield have surged to 7.5% in the year 2009, 7.9% in the year 2010 finally touching 8.97% in November 2011 following RBI measures to curb rising inflation. 

Precautionary factors that need to be kept in mind before recommending gilt funds

• Lower expense ratio, exit load charges and period (shorter the better).
• Fund size (large fund size could be a disadvantage at a time of extreme volatility).
• Portfolio (quality and liquidity of the papers held).

How much should you save to build your Retirement Corpus?

We see a lot of advise floating around when it comes to retirement planning.

Many experts advise to save a fixed percentage of your salary every month in order to build your retirement corpus, usually ranges from 5% to 20%.

But is this approach of having a ball park percentage figure for investment right?

How much should you be saving for building your retirement corpus?

How much you need to save depends on how much you need when you retire – your retirement corpus.

The fact is, how much you need to save is unique to you – no two people need to save the same amount for ensuring a financially independent retirement.

This is because the retirement corpus needed for you depends on many different factors, and since these factors vary from person to person, the actual amount of saving required also naturally differs!

So let’s have a look at the things that determine how much you should be saving for your retirement.

1. Standard of Living

Your retirement corpus is used to generate a monthly income for you in your retirement. So, its size is directly proportional to the monthly amount that needs to be generated.

The higher your standard of living, the more you would need each month in your retirement. This means you would need a higher retirement corpus, which in turn means that you need to save more every month while you are earning.

You can roughly calculate how much you would need in your retirement from your current monthly expenses. Of course, you would have to factor in inflation, and it would give you a rough idea about your needs in your retirement.

If you think you would not maintain the same standard of living in your retirement – say foreign vacations or fancy gadgets, then your expenses would obviously be lower.

2. Inflation

Inflation is an important factor when extrapolating today’s monthly expenses to your post-retirement expenses.

For doing this, you would use the compound interest formula and the most important factor there is the expected rate of inflation between now and your retirement.

A higher rate of inflation means that you would need more money to maintain the same standard of living, resulting in a higher retirement corpus – which means you would need to save and invest more every month today!

3. Income Expected in Retirement

Of course, if you have any other income in your retirement, that would reduce the need to generate additional amount.

This can be anything, say pension or rental income from your second flat / apartment. Or even small earnings from your hobbies. Anything.

Basically, if you have income in any form during your retirement, your retirement corpus would be lower, which means less investment needed while you are earning.

4. Rate of Returns / Interest Rate

The rate of return comes into play at two stages – for building your retirement corpus, and for generating the monthly income from your retirement corpus.

This rate of return also directly depends upon the instruments you choose for investment while saving for your retirement, and the instruments you choose to park your retirement corpus in.

If the rate of return is high during your earning stage, you would need to invest less every month. This would be the case if you are investing in instruments like shares / equities.

On the other hand, if you are investing in safe avenues like bank FDs and endowment plans of life insurance companies, the amount you would need to save every month to generate the same retirement corpus would be higher.

The rate of interest post-retirement is crucial in calculating the actual retirement corpus. If you would be parking the retirement funds in safe avenues generating steady income (like most people should do), the retirement corpus needed for you would be higher, resulting in higher monthly investment requirements today.

But if you can invest even some portion of your retirement corpus into high yield avenues like stocks, you would need a smaller retirement corpus, thus needing lower monthly investments today.

5. Years Remaining to Retirement

This determines for how long you can save and invest to build your retirement corpus. The earlier you start, the lower you have to invest every month.

6. Life Expectancy

The retirement corpus has to provide for your entire retired life when you are not earning. Therefore, your life expectancy plays a big role in the calculation of the retirement corpus.

The higher the life expectancy, the higher is the number of years for which your retirement fund needs to last and provide for you. Therefore, the higher would be the retirement corpus, and higher would be the amount you would need to set aside for your retirement.

Conclusion on Retirement Planning

As you can see, calculation of the retirement corpus depends on a number of factors, and many of these are assumptions. So, retirement planning can’t just be limited to setting aside a fixed percentage of your income every month.

It is a complex exercise, and the above mentioned factors should help you get an idea about the amount of investment needed for building your retirement.

Happy retirement planning!

Gilt Funds

Greetings,

We are recommending investors to invest in Long Term Gilt Funds with a horizon of 1 to 2 years.

Following are the funds you can invest in for the same:

• Birla Sunlife GSF LT - Growth
• HDFC Gilt Long Term - Growth (Prefered)
• Motilal Oswal Gilt Fund NFO

For more details write Vivek on vivek@wealthcare.net.in or call on +919820737626