NFO Review: IDBI Gilt Fund     (14-Dec-2012 )



IDBI Gilt Fund

An open-ended gilt fund which aims to actively invest in Government securities

Summary

Type An open-ended gilt scheme Face Value Rs 10
Min. Investment:

Additional Investment:
Rs. 5,000 and in multiples of Rs. 1 thereafter


Rs. 1000 and in multiples of Rs. 1 thereafter
Benchmark Index
Crisil Gilt Index
Entry Load Nil Exit Load * 0.50% for exit within 30 days
SIP Min Rs. 500 for Monthly SIP (of minimum 12 Months); Rs. 1,000 for Monthly SIP (of minimum 6 Months); Min Rs. 1,500 for Quarterly SIP (of minimum 4 quarters) Expense ratio:
2.25%
Issue Opens December 05, 2012 Issue Closes December 17, 2012

Investment Objective*

The objective of the Scheme will be to provide investors with regular income along with opportunities for capital appreciation. The Scheme will endeavor to achieve this objective through an allocation of the investment corpus in a diversified portfolio of central government dated securities, state government securities and treasury bills.


*Source: Scheme Information Document

Is this fund for you?

IDBI Gilt Fund (IGF) is a long-term gilt fund from the stable of IDBI Mutual Fund. IDBI Mutual Fund incorporated in January 2010 is relatively a new player in the Indian mutual fund industry (it launched its first mutual fund scheme – IDBI Nifty Index Fund in May 2010, followed by a Liquid fund in July 2010).

IGF is an actively managed gilt fund focusing on sovereign rated instruments with medium to longer maturity. As the funds in the long term Gilt category invest in Government Securities having maturity of over 3 years, even IGF will focus on investing in medium to long term g-sec instruments. The funds in the Gilt category emphasize on providing credit risk-free returns by investing in Sovereign rated Government Securities (G-Secs), Treasury Bills, RBI Bonds etc. Generally investing in a long term gilt fund is advisable when interest rates are expected to consolidate or ease down, while rising interest rates may prove harmful for this category. Thus, the timing of the launch of this NFO (IGF) is appropriate as the interest rates have almost peaked-out and we may soon see downside movement in interest rates.

By launching IGF, IDBI Mutual fund has diversified its product basket across the entire spectrum of investment options to suit all classes of investors and their diverse needs. Investments in G-Secs are less favourable among retail investors due to lack of adequate knowledge and high ticket size which makes it out of the reach of many individuals.

Hence, IGF provides an opportunity to the retail investors to benefit from the impact of interest rate movement on sovereign rated instruments across varying maturities, by taking exposure into G-sec instruments having medium to long maturity.

Portfolio & Investment Strategy

Being a long-term gilt fund, IGF will primarily invest in a diversified basket of dated Government Securities and Treasury Bills, while the allocation between them will be decided on the basis of interest rate outlook for the economy. The Fund Manager will take active calls on interest rate and will position the portfolio accordingly to maximize returns from investments with requisite emphasis on liquidity and safety. The investment approach for the scheme will make it suitable for investors with an investment horizon of atleast 12 months.

The Fund Manager will calibrate the portfolio exposure (maturity, supply of securities and liquidity) depending on the interest rate outlook and overall macroeconomic environment. The funds allocation will be dynamically managed without any duration constraints and the exposure to longer dated maturities will be higher at times when the interest rate outlook is benign and exposure to shorter dated maturities will dominate the portfolio when the interest rate outlook is negative. The returns generated by the fund would be commensurate with the levels of risk taken in the portfolio. The fund manager will structure the fund’s portfolio by prudently using cash and cash equivalent instruments to create liquidity as and when needed.

While allocating its assets among various debt instruments, IGF will follow the below allocation pattern. The indicative asset allocation pattern with minimum and maximum limits for instruments is detailed in the below asset allocation table. The Fund Manager, reserves the right to alter the asset allocation for a short term period on defensive considerations.


Asset Allocation Pattern
Instruments Allocation Range Risk Profile
(High / Medium / Low)
Government of India dated Securities 0%-100% Sovereign
State Government dated Securities 0%-100% Low
Government of India Treasury Bills 0%-100% Sovereign
(Source: Scheme Information Document)

From the above asset allocation pattern, IGF has its investment scope in both central and state Government securities. Though, its overexposure towards one segment may end up with high concentration risk, but low credit risk. It however holds flexibility to shift its maturity which may help it manage interest rate risk in the rising interest rate scenario and take advantage of easing interest rate scenario.

In addition, the IGF may enter into Reverse repos in Government of India dated securities eligible for repo transactions and treasury bills of all maturities as maybe permitted by RBI. It may also hold cash or participate in the CBLO market to meet liquidity requirements. The fund holds flexibility to invest in derivatives (up to 50% of its net assets) for hedging, portfolio balancing and such other purposes as maybe permitted from time to time.

IGF however does not propose to invest in Securitized Debt/ADRs/GDRs and foreign securities.


Fund Manager Profile

The fund will be managed by Mr. Gautam Kaul – Fund Manager Fixed Income at IDBI Asset Management Ltd. Mr. Kaul is a commerce graduate and an MBA. He has over 10 years of experience in Fixed Income dealing and fund management. Prior to joining IDBI Asset Management Ltd, he was a Dealer and Fund manager Fixed Income at Religare Mutual Fund and has also been associated with Sahara Mutual Fund and Mata Securities Pvt. Ltd.


Fund Outlook

It is given that IGF will focus on government securities with flexibility to change maturity based on prevailing interest rate conditions. Being an actively managed gilt fund, the fund may have ability to do well during easing interest rate conditions. Also, it is important to note that its exposure towards longer maturity instruments will make it highly sensitive to interest rate changes, especially in rising interest rate conditions.

IGF will work like other Gilt funds that follow active management strategy and do shift portfolio maturity based on the fund manager’s view on interest rates.



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