At times opportunity comes disguised in adversity. And mutual funds have learnt fast to turn these adversities into opportunities. From offering plain vanilla gilt offerings earlier, fund houses have now extended this product to offer a more diversified range of options to investors. And how did this happen? Believe it or not from interest rate volatility!

Not so long ago, we had funds investing in government securities (gsecs/gilts) of all maturities within the same scheme. At that point of time, that was good enough and served the purpose of offering investors a window into the gilt market. Over a period of time, this plain vanilla gilt fund got a little risky for investors as interest rate volatility set in. Gilt funds invest in sovereign-rated paper and are secure from credit default. However, they are exposed to interest rate risk resulting in volatility in the NAV. A lot of investors who were in gilt funds for the safety that they offered, found this volatility disconcerting.

So mutual funds decided to do a little innovation and diversified the hitherto plain vanilla gilt fund into a long-term gilt plan and a short-term gilt plan. As the names suggest this bifurcation was done to allow long-term (over 12 months) investors to take exposure to long-term gilt funds (investing in maturities of over 5 years). Retail investors (including high networth individuals) and corporates who were looking for a window to park their cash for the short term (upto 6 months on the outside) can invest in a short-term gilt plan that invests in government papers of shorter maturities.

Short Term Gilt Plans

Gilt (Short Term)	NAV (Rs)	1-WK	1-MTH	6-MTH	1-YR	INCEP.
TEMPLETON GSEC TP G	10.3	0.1%	1.2%	-	-	2.6%
ZURICH I GILT SP G	12.0	0.1%	0.5%	2.8%	6.1%	8.2%
PRU ICICI GILT TG	13.5	0.3%	0.3%	2.7%	9.3%	11.1%
MAGNUM GILT STP D	10.0	0.2%	0.2%	1.0%	6.8%	7.9%
DSP ML GSEC B D	10.4	0.2%	0.2%	2.5%	8.2%	10.5%
GRINDLAYS GSEC STP G	9.9	0.2%	0.0%	-	-	-1.1%
HDFC GILT ST G	10.8	0.1%	-0.2%	2.3%	-	7.8%

(NAVs as on June 13, 2002. Growth over 1-Yr is annualised compounded)

The bifurcation between long-term and short-term gilt plans helps investors to make more accurate investments by targeting the maturities they want. For instance, investors who have invested in the short-term gilt plan over the last month should be pleased as their investments haven't fared too badly due to the Indo-Pak border tensions. That is, their investments haven't fared too badly vis-à-vis long term gilt plans.

Long Term Gilt Plans

Gilt (Long Term)	NAV (Rs)	1-WK	1-MTH	6-MTH	1-YR	INCEP.
K GILT 2011 D	10.8	-0.1%	-2.7%	3.5%	16.9%	18.9%
K GILTL 2019 G	12.3	0.5%	-1.6%	2.7%	-	22.7%
GRINDLAYS GSEC IP G	9.9	0.5%	-0.7%	-	-	-1.0%
PRU ICICI GILT IP G	15.7	0.7%	-0.5%	4.4%	20.5%	17.2%
PIONEER I GILT IP G	10.5	0.8%	-0.4%	-	-	6.2%
ZURICH I GILT PT G	13.8	0.6%	-0.3%	3.5%	21.6%	15.1%
TEMPLETON GSEC D	10.9	0.6%	-0.3%	2.8%	18.8%	16.3%

(NAVs as on June 13, 2002. Growth over 1-Yr is annualised compounded)

Gilts with longer maturities have been worst hit by the tension on the border. This is evident from the 1-month NAV growth figures, which would be very disappointing for investors. At times of political and economic turbulence longer dated paper gets hit the most and its safest to remain invested in shorter-dated paper.

Gilt funds offer a high level of safety in terms of credit quality (of the instruments). However, they can also be a victim of interest rate volatility. So investors need to weigh the pros and cons and understand the long and short of it before they choose a gilt plan.

 

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