Nonetheless, gilt funds are turning as an attractive investment option. Dileep Madgavkar, chief investment officer at Prudential ICICI AMC says, ``The spread between returns provided by corporate debt and gilts has really reduced. So looking at the risk-return trade-off, gilts are rising as an attractive investment avenue.''

According to fund managers, returns from a gilt fund also depend on when the fund is launched and when the proceeds are invested. ``If investments are made when interest rates are falling, you are likely tolock your investments at a higher price (lower yield) and vice-versa,'' said a fund manager.

With various restrictions on provident funds, fund managers expect PFs to route their investments through gilt funds. PPFs are generally faced with the lot problem since the minimum deal in the gilt segment is for Rs 5 crore.

Thus, small PFs face the difficulty in deploying the funds in government securities. ``These are not able to get the right security prices and have difficulty in selling as well. These fund usually have to scout for securities or wait till they can invest. Hence, open-ended gilt funds, which are NAV driven on a daily basis, can be used for putting money,'' said Milind Nandurkar, fund manager at Sun F&C Asset Management Company. Besides, PF accounts are not generally professionally managed and hence, are not able to derive maximum returns.

Nandurkar points out that when interest rates fall, fresh investments would be done by the fund managers at a lower rate of interest but the existinginvestments will appreciate. ``In debt, there are two ways of getting returns - one is interest payments and the other is through price appreciation. In the scenario when the interest rates fall, the existing portfolio is invested in longer term securities to get higher returns,'' said another fund manager.

As of today, the interest rates are on the lower side and are expected to be easy for some more time so that the returns on gilt funds would be normally higher. This is the reason why so many mutual funds are running to launch a gilt fund.

Gilt funds, as compared to 12 per cent provident fund, give a higher return. Besides interest rate return, active trading in government securities gives a significantly higher yield on the portfolio. On the other hand, the passive buy and hold method will give returns equal to the coupon of government securities. The yield curve changes with the change in interest rates. When interest rates change, the prices of securities will change so the fund managers canactively move from one duration of basket to another duration and get maximum appreciation.

However, a fund manager pointed out that when fund managers espouse the fact that they will be able to generate higher returns based on trading, it should be understood that the trading is a zero-sum game and if there are gains to be made, then losses are also not far behind.

Interest rates have been falling in the Indian market for the last two years and have fallen with a few blips in the last six months since Kotak Mahindra Mutual Fund launched the first gilt fund. But a fund manager pointed out that if there is credit offtake in the economy and forex volatility, the call money market will tighten as borrowings from the money market would be used to play in the forex market. And in such a scenario, the returns from gilt funds would fall as interest rates would move up.

Gilt funds are emerging as the hottest product for mutual funds and a whole gamut of mutual funds have lined up plans to launch gilt funds.Canbank Mutual Fund, LIC Mutual Fund, PNB Mutual Fund, Prudential ICICI Mutual Fund, IDBI Mutual Fund, Templeton Mutual Fund and Tata Mutual Fund are some of the mutual funds eyeing to enter the market with the launch of a gilt fund.

Kotak Mahindra Mutual Fund was the first asset management company to launch a gilt fund with the assets under management of the fund around Rs 250 crore. Dundee Mutual Fund has recently launched a gilt fund.