Short-term Gilt Funds: Superior Returns

Updated: Aug 31 2003, 05:30am hrs
A 50 basis point cut in the repo rate by RBI has brought action in the 17-fund category of short-term gilt funds. Post-repo rate cut, the category gained 0.73 per cent in a single day - on August 25, 2003.

This one-day return was even higher than the categorys monthly return over the past three months. The repo rate cut took the bond markets by surprise as most players were expecting any decision on this only in October.

Whatever be the case, this has provided the much-needed push to the short-term gilt funds.

In the trailing six-month period, short-term gilt funds are up 4.34 per cent as on August 28, 2003, which is better than the short-term debt funds 3.69 per cent return. The reason why short-term gilt funds did well is due to their portfolio composition.

These funds invest in short-term government securities and treasury bills, which respond more actively to interest rate changes in comparison to corporate bonds, where most short-term debt funds invest in. Thus, the benefit of repo rate cut would naturally be greater in case of short-term gilt funds.

Short-term gilt funds are good investment avenues for steady income-seekers, with a short-time horizon of 3-6 months. Also, as these funds invest in shorter maturity gilts, the adverse change in interest rates has a limited impact on their NAV vis-a-vis long-term gilt funds.

Thus they are less volatile than their long-term counterparts. While standard deviation for long-term gilt fund ranges between 1.39 and 1.75, in the case of short-term gilt funds it hovers around the 0.21-0.43-range.

That apart, short-term gilt funds also score over medium-term debt funds, as the former comprises superior credit quality instruments in comparison to the latter, which invest in corporate bonds of different quality.

Apart from fetching good returns, this has also made medium-term debt funds more volatile. And this is where short-term gilt funds have proved to be a cut above these funds. During highly volatile times such as in July 2000, September 2001 and May 2002, an average short-term debt fund displayed better resilience vis-a-vis an average medium-term debt fund.

Superior returns apart, gilt funds are yet to catch retail investors interest in a big way. Recently, key stock exchanges kicked off trading in government securities, almost on the lines of stock trading, to increase retail participation. However, gilt funds will continue to enjoy an edge due to their professional management, diversification and, above all, ease of investing.

Nevertheless, short-term gilt funds have been losing their sheen to the new kid on the block short-term debt funds. Nearly 20 such funds were launched in 2002 and together these funds now manage over Rs 10,000 crore worth of assets. And only one fund - Reliance Gilt Short-term - has been added in the category this year. Interestingly, this new fund is the largest fund in the category with assets of Rs 54.27 crore as on July 31, 2003.

My take among short-term gilt funds include:

Magnum Gilt Short-term-G: This fund boasts one of the best six-month returns in the category. The fund has actively managed is portfolio.

The funds current average maturity of 2.88 years lies in the middle of the category. Launched in December 2000, it has delivered an annualised return of 10.42 per cent.

Prudential-ICICI Gilt Treasury Plan: Launched in August 1999, this fund is managed aggressively.

The funds year to date return of 6.36 per cent is well above the category average of 5.31 per cent as on August 28, 2003. Overall, since launch the fund has posted a return of 10.82 per cent.

Value Research