Fund pick: SBI Magnum Gilt Fund

Taking right calls

SBI Magnum Gilt Fund - Long Term, launched in December 2000, is classified in the long-term gilt category of CRISIL Mutual Fund Ranking. The fund, which has been managed by Dinesh Ahuja since January 2011, has been ranked in the top 30 percentile (CRISIL Fund Rank 1 and 2) for the past eight quarters, since March 2013.

Compared to the previous quarter, the long-term gilt category’s average AUM grew by 79 per cent, while the fund’s average AUM jumped by 193 per cent to Rs 843 crore as of the quarter ended March 2015. This can largely be attributed to policy rate cuts by the RBI in January and March 2015.

Investment objective

The fund’s investment objective is to provide investors with returns generated through investments in government securities (G-sec) issued by the Central and/or state governments. The fund aims to take active duration calls and generate favourable returns. When interest rates fall, gilt funds benefit as interest rates and bond prices are inversely related.

Performance, duration management

The fund has outpaced its benchmark as well as peers across various time frames (see chart).

The fund has actively managed the interest rate risk compared to its peers. It has increased average maturity of the portfolio when interest rates were expected to fall and vice versa.

In the past three years ended February 2015, the fund had 80 per cent exposure to Central government papers, four per cent to state government papers and 15 per cent to cash equivalents.

When interest rates were on an uptrend, the fund reduced its average maturity to 9.08 years in December 2013 (vs the category’s average maturity of 12.09 years for the same month) from 15.45 years in April 2013. During the same period, 10-year G-sec moved up from 7.88 per cent in April 2013 to 9.01 per cent in December 2013. In this period, the fund returned 1.08 per cent vis-à-vis the benchmark’s -5.87 per cent and the category’s -2.56 per cent.

The fund has increased the average maturity from five years in April 2014 to 20.41 years in February 2015. During this period, 10-year G-sec softened from 9.02 per cent in April 2014 to 7.87 per cent in February 2015. The fund increased G-sec exposure to 98 per cent in February 2015 from 68 per cent in April 2014, with the remaining in cash and cash equivalents. During this declining phase, the fund delivered 24.33 per cent annualised returns against I-SEC Li-Bex index’s 22.30 per cent and the category’s 20.86 per cent.