Seeking recommendations for MFs/ ETFs to pledge from the list in the cash component sheet.
I do not wish to unpledge the etf/mf in the next 4-5 yrs, and hence was wondering if there’s a straight forward answer to this.
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Sovereign gold bond
Gilt funds
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Money market funds
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As part of investment mix, NiftyBees + sov gold + long term gilt might make sense.
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But if the balance primarily belongs to trading, then having volatile assets makes little sense to me. So i don’t consider gold or funds with significant credit/duration risk.
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Ideal would probably be a pure 1/2 yr gilt fund - no credit risk and only slight duration risk and in return you can get better yield. I think short term gilt as a category seems to have disappeared from Mutual funds, i only see them as part of mix of stuff but not standalone. Probably we can buy it from market, i have not explored this - not sure how liquid they are + we will probably have to buy them again every time they expire + pay tax on interest.
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So instead we have overnight and liquid funds. Both are relatively safe, overnight is safer ( holds liquid collateral) and in return you get lower yield. But interest rates are anyway so low, so i use overnight funds only. They give about 3% returns right now. Maybe overkill but i don’t see point of taking any extra credit risk for small change.
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If some volatility is ok, you can consider either directly buying say 2-5 year gilt from market ( i have no experience with this) or something like IDFC GILT 2027 INDEX FUND DIRECT PLAN-GROWTH ( just noticed this for first time in sheet). Yield is above 6% right now i think + 0.15% fund expense.
Gilt does carry some duration risk so if interest rates shoot up, you will get some m2m losses. 10y gilt will have larger impact than 5y/2y gilts. But you can hold it till maturity.
Edit - I am liking ‘IDFC GILT 2027 INDEX FUND DIRECT PLAN-GROWTH’ more and more. Normally, funds will keep constant duration( usually 10Y for gilt funds), but this will hold till maturity and expire so you can get reasonable idea of yield + it will get less volatile with time as maturity date approaches. This is also much better than investing in gilts directly i think as we don’t have to pay tax on interest every year and can get indexation later on.
Some more info - IDFC Gilt Index Funds 2027, 2028 Review
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@SpacemanSpiff thanks for sharing the thought process. This helps.
I was basically looking for something that gives better returns over long term than liquid funds with an acceptable trade off on the credit/ interest rate risk side. Will explore short term gilt mfs.
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For me, any credit risk is not worth it in general and especially in open ended funds.
Problem is when something is wrong, information can leak before debt gets downgraded. Large players have in past gotten out ahead of others. To service their exits, liquid part of the portfolio gets used. So those that remain, end up with very high concentration of bond that is about to fail. Has happened quite a few times. I think in DHFL episode, some of the funds ( tata?) were holding 30% of it.
So just not worth it. There are some rules to mitigate that now, but i don’t trust that this wont happen again.
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What’s the advantage of long term gilt over normal gilt funds? Like HDFC gilt fund
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First of all i am not an expert and have more or less stopped looking at these things since i started trading. freefincal is a good place to understand and Value research can give you data.
First you should know that bonds are sensitive to Interest rates. If rates go up, their value goes down. This way yields of the bonds can stay aligned with current market. And vv. Longer the duration of bond, more sensitive it will be.
After sustained reduction in interest rates, long term gilt funds can give outsized returns. This can also be a trap as people looking at 13-15% returns invest and then suffer if rates bounce back. HDFC gilt worst quarter was -11.55 20-May-2013 - 19-Aug-2013 as per VR. This can also be an opportunity if you could have entered
before rates fell.
Next, You can look at scheme documents of fund to check what they do.
HDFC Gilt seems to be a dymanic gilt fund. They say
The Scheme will invest the proceeds of the Scheme in Government securities issued by the Center and/or States on the basis of expected interest rate outlook.
HDFC Gilt Fund, Gilt Mutual Funds, Debt Funds, Gilt Funds – HDFC Mutual Fund
So they are supposed to take calls and those calls are supposed to have an edge, In practice its hard to say. I have seen ICICI all seasons fund ( had another name when i had invested ) do well through some events and also seen Birla version of this do terrible. They just sat when interest rates fell and also when they bounced back. Some of this will have luck in it too. And to make things worse, these funds usually have very high expense vs what we get. They take away more than 10-20% of returns on average if you hold for long term. That’s just too much for me, i end up taking risk for potentially small improvements in returns but guaranteed high expenses.
So i don’t think they are worth it. Always look at expense.
Long term gilt funds, say fixed 10Y, may have some value as part of a diversified portfolio if you can manage periodic balancing. I have not done the work myself so i dont have numbers. freefincal had some good articles on this but you will have to search for them. There are cases when equity and long term bonds can be negatively correlated and this can be useful. Ex during corona markets crashed and so did interest rates. So gilts gave good returns and you can use that to move some money back to equity. If interest rates are very low, then long term bonds perhaps are not useful.
These days my focus has shifted to trading as i trade full time. I don’t bother with debt as much, only using small portion in liquid funds as they give instant redemption. Due to availability of pledging we can get some additional returns + reduce/avoid impact of quarterly settlement so i started investing in overnight funds. and now i might in future mix it up by using low expense funds such as the IDFC once above as they 3% more than overnight and that should be reasonable margin against IR changes.
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Following. I am also following a similar plan with 25% of my pledged portfolio across cash, SGB, low-risk Debt MF and Equity MF, each. I have the following MFs as of now:
- ADITYA BIRLA SUN LIFE CORPORATE BOND FUND - DIRECT PLAN
- KOTAK SMALL CAP FUND - DIRECT PLAN
- ICICI PRUDENTIAL US BLUECHIP EQUITY FUND - DIRECT PLAN
- AXIS BLUECHIP FUND - DIRECT PLAN
Axis Bluechip Fund, Parag Parikh Long Term Equity Fund, and UTI Flexi Cap Fund are good ones to go with.