Short-term Gilt Funds Witness Increase In Returns

Mumbai, January 27: | Updated: Jan 28 2003, 05:30am hrs
Mutual fund players have had much reason to cheer in the recent past as they witnessed a noticeable rise in returns posted by short-term gilt funds as against debt and equity funds. Retail investors seem to exude more faith in the expertise of fund managers than retail trading in government securities facilitated by financial regulators in the key stock exchanges in India.

As on January 17, 2003, an average short-term gilt fund posted a 10.09 per cent return. On the other hand, short-term debt funds and cash funds clocked an average return of 8.43 per cent and 7.73 per cent, respectively.

Fund managers reckon that gilt funds will continue to enjoy an edge over retail trading due to their professional management, diversification and, above all, ease of investing.

Said Dhaval Dalal, head fixed income, DSP Merill Lynch Asset Management Company (AMC), Short-term gilt funds are ideal for steady income seekers with a short time horizon. These funds have no credit risks and have low susceptibility to interest rate changes. Short-maturity government securities and treasury bills form the asset basket of these funds.

Since these funds carry sovereign backing, the likelihood of default is virtually nil. Also, as these instruments are short term in nature, the change in interest rates has a limited impact on their market price. he explained.

In contrast, longer-maturity government securities respond more actively to interest rate changes, he pointed out.

The reason why short-term gilt funds did well is that government securities respond more actively to interest rate changes in comparison to corporate bonds, which most short-term debt funds invest in, Mr Dalal said.

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, he opined.

During highly volatile times such as in July 2000, September 2001 and May 2002, an average short-term debt fund displayed better resilience compared with the average medium-term debt fund, he said.

However, mutual fund analysts cautioned that short-term gilt funds have been losing their sheen to the short-term debt funds.

On the other hand, aggregate assets under management of 11 short-term gilt funds have come down from Rs 474 crore in December 2001 to Rs 150 crore in December 2002. Perhaps investors distaste for volatility could be the reason for this fall in their asset base, analysts opine. However, fund managers differ as they said retail interest in gilt funds was on a steady rise thanks to increasing investor awareness.