Gilt funds: The dark side
Dec 13, 2001

Author: PersonalFN Content & Research Team

We have seen the good side of the gilt rally when gilt prices were incredibly robust. Some gilt funds had posted (year-on-year) growth in excess of 30%. However, this week we saw a reversal in fortunes, literally.

There was a correction waiting to happen in the gilt rally. We sounded that out to investors about a fortnight ago in our story Bond rally: Too good to last? Clearly gilt funds were growing at a pace too blistering for their own good. Some gilt funds appreciated by 7% in November alone and quite a few grew by over 30% year-on-year. RBI's (Reserve Bank of India) Rs 60 bn (Rs 6,000 crore) gilt auction achieved its objective of sucking the liquidity out of the system. It checked the bond rally and stemmed the growth in gilt prices.

The amazing performance posted by gilt funds until last week is obviously good news for the gilt fund investor. But you can't have too much of a good thing. The problem with such a great performance is that investors want it every week, month and year. To compound matters very few investors actually understand the complexities and peculiarities associated with a gilt fund.

GILT FUNDS	NAV (Rs)	LAST WK (%)
TATA GSEC B APP	15.4	-2.3%
PRU ICICI GILT IG	15.0	-1.5%
TEMPLETON GSEC G	16.0	-1.5%
BIRLA GILT LT G	15.1	-1.5%
K GILT INV G	15.8	-1.4%

Gilt prices were unreasonably high and there was a strong likelihood of investors seeing a small correction in their gilt portfolios. After highlight the fundamental factors that could go wrong with the economic scenario, we had advised investors to adopt caution and even redeem a part of their gilt fund investments so as to exit at a higher level. However, very few investors would have actually redeemed at that level and many would be redeeming right now in panic.

Investors, particularly in gilts/gilt funds, need to be a lot more aware about the economic scenario and RBI's borrowing policy, factors which have a strong bearing on gilt prices. Only then can they hope to make money on their investments, else they will be making the same old mistakes of entering high and exiting low.

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