Category: Your Money

Many investors believe that more risk implies more returns. However, that is an over-simplification: more risk implies a higher probability of more returns (and a higher probability of loss, as well.) Higher risk also implies higher volatility. This graphic is probably the best illustration of the relationship between risk, volatility and returns.

As mutual fund investors, you may have come across the ICICI Prudential “Very Aggressive” and the “Very Cautious” funds. Lets compare their relative performance across different time horizons to further understand the relationship between risk, volatility and returns.

Since March 2008

Since 2008-03-03, ICICI Prudential Very Aggressive fund has returned a cumulative 56.24% vs. ICICI Prudential Very Cautious fund’s cumulative return of 53.30%. The 3% out-performance came with significant stomach-ulcer causing volatility.

It would require someone to have some serious testicular fortitude to hang-on to their investments after a 45% drawdown. It took the “Very Aggressive” fund more than a year to claw itself out of the hole. And many investors would have abandoned the fund during that period.

Here’s wealth chart:

Since March 2009

Boom!

Since 2009-03-02, “Very Aggressive” returned a cumulative 169.40% vs. the “Very Cautious” cumulative return of 41.37%. Max Drawdown: -13.81% vs. -4.70%.

Peace of mind came with a very high performance penalty.

Since March 2010

Since 2010-03-02, “Very Aggressive”: 50.02%, “Very Cautious”: 35.48%.

And This Year

Since 2010-03-02, “Very Aggressive”: 17.58%, “Very Cautious”: 7.54%.

Conclusion

The real risk, if you are investing for retirement, is the inability to maintain a certain lifestyle post-retirement due to inadequate savings. Ideally, your investments should be risk-seeking when you are young and risk-avoiding as you near retirement. You can use a set of funds to reflect this attitude towards risk. And there is almost never a “one-size-fits-all-5-star-gold-plated” fund that you can remain invested forever.

You can run our very own comparison tool: FundCompare to see how different funds performed over different time frames, indices and other funds.
 
 
 
 

With the consensus on RBI rate cuts beginning next year, investors have been lapping up long-term government bonds (gsecs or gilts, if you wish.) The long-end has been bid so hard that the yield curve is flat as a pancake.

GSec Total Return Indices have tracked this, except for the hiccup back in May last year.

Short-term:

Medium-term:

Long-term:

Drawdowns

May’13 was a rude reminder to investors who thought that you cannot lose money investing in government bonds. You can. Investors in the long-end of the curve are yet to recover from the drawdown last year.

Should you expect actively managed gilt funds to do better?

UTI – GILT ADVANTAGE vs. ICICI Prudential Long Term Gilt

UTI’s fund has a much shorter duration compared to ICICI’s (4.1 vs. 7.35 years.) And the returns that the funds have posted exemplify the importance of incorporating the fund portfolio’s duration into your decision making.

Since 2012-01-05, UTI – GILT ADVANTAGE-LONG TERM has returned a cumulative 24.59% vs. ICICI Prudential Long Term Gilt Fund’s cumulative return of 20.16%.

UTI – GILT ADVANTAGE vs. Birla Sun Life Gilt Plus

Since 2012-01-05, UTI – GILT ADVANTAGE has returned a cumulative 24.59% vs. Birla Sun Life Gilt Plus’s cumulative return of 14.79%. And BSL’s fund is yet to recover from the May’13 drawdown.

UTI – GILT ADVANTAGE vs. HDFC Gilt Fund-Long Term

Since 2012-01-05, UTI – GILT ADVANTAGE has returned a cumulative 24.59% vs. HDFC Gilt Fund-Long Term’s cumulative return of 22.01%. Of the three funds we compared, this is the closest any gilt fund has come to matching UTI’s returns.

UTI – GILT ADVANTAGE vs. GSEC SUB 3-8 TRI

Since 2012-01-05, UTI – GILT ADVANTAGE-LONG TERM has returned a cumulative 24.59% vs. GSEC SUB 3-8’s cumulative return of 18.55%. The fund beat the sub-index hands-down.

Conclusion

It looks like the UTI Gilt Advantage fund is a well managed fund that has beat its peers and benchmarks. But as the standard disclaimer reads, “past performance does not necessarily predict future results.”

You can run the comparison tool here: FundCompare