NFO Review: Motilal Oswal MOSt 10 Year Gilt Fund
Nov 28, 2011

Author: PersonalFN Content & Research Team

Motilal Oswal MOSt 10 Year Gilt Fund

An open ended gilt scheme from Motilal Oswal Mutual Fund.

Summary

Type	An open-ended gilt scheme	Benchmark Index	10 Year Benchmark GOI Dated Security and Crisil Gilt Index
Min. Investment:/ Additional Investment	Rs 10,000/ In the multiples of Rs 1,000	Face Value	Rs 10 per unit
SIP:	Min Rs 1,000 for Monthly SIP; Min Rs 2,000 for Quarterly SIP	Expense ratio:	0.99%
Entry Load	Nil	Exit Load *	0.50% for exit within 3 months
Issue Opens	November 21, 2011	Issue Closes	December 05, 2011

Investment Objective*

The primary investment objective of the scheme is to generate credit risk-free returns by investing in a portfolio of securities issued by the Central Government and State Government.

However, there can be no assurance or guarantee that the investment objective of the scheme would be achieved.

*Source: Scheme Information Document

Is this fund for you?

Motilal Oswal MOSt 10 Year Gilt Fund (MGF) is a long-term gilt fund from the stable of Motilal Oswal Mutual Fund. Motilal Oswal Mutual Fund is a relatively a new player in the Indian mutual fund industry (it launched its first mutual fund scheme – MOSt Shares M50 - MOS ETF, an Exchange Traded Fund (ETF) on July 28, 2010).

As MGF is a long term gilt fund, the funds in the long term Gilt category invest in Government Securities having maturity of over 3 years. These funds 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 (MGF) is appropriate as the interest rates are almost peaking-out and we may soon see interest rates falling after some consolidation.

The launch of MGF is unique in the sense that it is the first debt mutual fund which will be closely tracking the benchmark 10-Yr G-Sec (currently 8.79%, 2021) bond floating in the bond markets at various point of time. 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, MGF provides an opportunity to the retail investors to benefit by taking exposure to 10-Yr G-Sec and closely track the same.

Portfolio & Investment Strategy

Being a long-term gilt fund, MGF will primarily invest in the 10 yr Benchmark G-Sec along with other dated Government securities in the range of 7-12 yrs of residual maturities, Treasury Bills, Cash Management Bills (CMB) and various money market instruments. The fund manager will aim to keep the fund’s liquidity high by investing in liquid instruments and also maintain highest level of credit quality. 10 yr G-Secs are highly liquid and also maintains highest level of credit quality.

Moreover the investment decisions on various instruments available in the market will be taken on the basis of the following parameters to include them in the fund’s portfolio:

Liquidity of the security
Maturity profile of the instruments
Quality of the Security / instrument (including financial health of the issuer)
Returns offered relative to alternative investment opportunities
Prevailing interest rate scenario

While allocating its assets among various debt instruments, MGF will follow the below allocation pattern.

Asset Allocation Pattern

Type of Instrument	Allocation Range	Risk Profile (High / Medium / Low)
10-Yr Benchmark Government Security	90%-100%	Low
Other Government Securities (7 to 12 years), T-Bills, CMBs, CBLO & Repo	0%-10%	Low

(Source: Scheme Information Document)

From the above asset allocation pattern, MGF has a very limited scope of investment in debt instruments and may end up with high concentration risk, but low credit risk. The low flexibility to shift its maturity may on the other hand lead to high interest rate risk in the rising interest rate scenario.

Fund Manager Profile

The fund will be managed by Mr. Abhiroop Mukherjee – Senior Manager Fixed Income at Motilal Oswal Asset Management Company Ltd. Mr. Mukherjee has to his credit a PGPBF (Finance) from National Institute of Bank Management and a B.Com (Honours) from Calcutta University. He has over 4 years of experience in Fixed Income trading. Prior to joining Motilal Oswal Asset Management Company Limited, he was a Wholesale Debt Market (WDM) dealer with PNB Gilts Ltd Mumbai.

Fund Outlook

Given that MGF will closely track the 10 Year Benchmark G-Sec, its fortunes will be closely knit with that of the prevailing 10 year Benchmark G-Sec (at present 8.79%, 2021). Also, it is important to note that long-term gilt funds having exposure to longer maturity instruments are highly sensitive to interest rate changes. As MGF will stay invested in 10 year G-Sec, this fund may lag other actively managed gilt funds during times of rising interest rates.

However, the concept of tracking the 10 Year Benchmark G-Sec is unique as it gives investors a chance to take exposure into a pre-specified long-term G-Sec and closely track the same. While other Gilt funds due to their active management strategy do shift portfolio maturity and hence close tracking of a 10 year G-sec is not always possible.

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