Prices of government securities (Gilts) have been depressed over the past few days as fears of an interest rate hike looms large. The effect on net asset values (NAVs) of gilt funds has been equally depressing.

Inflationary concerns are high at the moment stemming mainly from the increase in commodity prices and cost of imports (with the rupee depreciation). The way things stand currently, there are some who believe that an interest rate hike is likely. These fears have translated into an increase in gilt yields (i.e. lowering of gilt prices), driving down NAVs of gilt funds.

Open-ended, Gilt Schemes	NAV (Rs)	Last week	Last month	Last year	Since inception
Zurich(I) Sov Gilt (SP)(Gr)	10.41	0.20%	0.70%	0.00%	3.90%
JM G-Sec (STP)	10.50	0.20%	0.30%	0.00%	8.00%
K Gilt Savings (Gr)	11.64	0.10%	0.50%	10.90%	10.90%
JM G-Sec (PFP) (Gr)	11.17	0.10%	0.00%	0.00%	11.60%
Chola Gilt (SP)(Div)	10.17	0.10%	0.80%	0.00%	1.70%
Alliance Govt.Sec.(ST)(Gr)	1072.82	0.10%	-0.20%	0.00%	7.00%
Birla Gilt Plus Liquid (Gr)	10.92	0.10%	-0.30%	0.00%	9.10%
Tata Gilt Sec. B (App)	11.32	0.00%	-0.60%	0.00%	13.10%

Except for the 7 gilt funds in the above table, all other gilt funds have posted negative gains over the last week. Only 4 out of 7 gilt funds in the above sample had positive gains over the last month. Investors in gilt funds must realise that while these funds do not have a credit-risk associated with them, the interest rate risk is very much there. As inflation shows no sings of abatement, gilt prices are unlikely to look up in the near term. This means that gilt fund NAVs will continue to remain depressed.

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