Gilt Funds don't necessarily invest in government securities (Gsecs) of varying maturities. Some gilt plans invest in a government security of a maturity thereby locking the yield at a rate. These plans are more popularly known as serial plans.

Earlier we outlined the merits of short term and long term gilt plans and how investors can choose the plan depending on their investment horizon, i.e. less than 12 months or over 12 months. Serial Plans are just an extension of that. For instance, in a long term (investment) gilt plan, a fund manager may invest in a range of securities with maturities over 5 years. But that itself could be too diversified for a investor who wants to know his yield at the outset before entering the plan.

This is where serial plans come in. With a serial plan the fund manager chooses to invest in a government security of a particular maturity. This is announced by the fund house before the launch of the plan. For instance, K Gilt 2011 Serial Plan invests only in 11.50% GOI 2011 as is evident from its name. This way investors investing in this fund know what they are getting into.

Serial Plans: Lock your yield

SERIAL PLANS	NAV (Rs)	1-WK	1-MTH	6-MTH	1-YR	INCEP.
K GILT 2013 G	13.8	-0.6%	2.0%	5.6%	22.4%	24.4%
K GILT 2019 G	12.2	-0.8%	2.7%	3.2%	21.7%	21.7%
K GILT 2011 G	13.0	-0.6%	2.1%	4.7%	17.6%	20.0%
K GILT 2007 G	14.6	-0.2%	1.1%	3.9%	15.3%	15.8%
K GILT 2005 G	12.7	-0.1%	0.8%	3.3%	11.0%	9.7%

(All NAVs as on June 18, 2002. Growth over 1-Yr is compounded annualised)

The Positives

• Investor can lock the yield right at the beginning if he holds till maturity.

• If he plans to hold till maturity he is not adversely impacted (nor concerned) with the volatility in gilt markets.

• Compared to debt funds, serial plans offer more comfort to the investor as gilts carry a sovereign rating.

The Negatives

• The interest rate risk to the investor could be significant as the fund does not diversify by investing in instruments of other maturities.

• In times of excessive interest rate volatility remaining invested till maturity could be the only way to make a profit on your gilt fund. In that case, the gilt plan has a self-imposed lock-in and turns illiquid for the investor.

• Currently the serial plans on view have a high entry level at Rs 1 m (Rs 10 lakhs), additional investment  Rs 100,000 (Rs 1 lakh). Retail investors are bound to find this level unreasonable and this plan will appeal mainly to high networth individuals and corporates.

Serial plans are definitely worth a look for the investor with a longish investment horizon. Or to put it more precisely, if your investment horizon matches that of the serial plan then it is something that you may want to look at seriously. You not only get a very attractive yield on your gilt plan, but you are also insulated from the interim volatility in interest rates.

 

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