Looking at the mayhem in the market, it can get depressing checking out the returns of equity funds. Some have even fallen by around 67%. But just when you think all is lost, there are a category of funds that have actually delivered positive returns (1-year returns till date).
Gilt funds are mutual funds that invest in government securities (G-Secs) including central government dated securities, state government securities and Treasury Bills. Investments in G-Secs fetch the highest level of safety as they are immune from default. The only risk here is the interest rate sensitivity since they are marked to market. So if the interest rate goes down, the price of the security rises and vice versa. This is primarily because if the coupon rate of the bond is higher than the current rate of interest, people are willing to pay more for such a bond.
The recent cut in the Cash Reserve Ratio (CRR) and Repo Rate has favoured gilt funds since it made the mark-to-market valuations of G-Secs and corporate debt attractive. In fact, Monday’s 1% cut in the Repo Rate saw prices of government bonds surge immediately.
Looking at the one-year returns (as on October 23, 2008), 37 out of 921 funds managed to post a positive double digit return, the majority being gilt funds investing in long-term government paper. The yield of 10 year benchmark slipped from 9.51% to 7.69% (July 15, 2008 – October 20, 2008) as a result of appreciation in the prices of the government bonds.
ICICI Prudential Gilt Investment PF was major gainer with 23.32%. A proactive call towards the interest rate outlook has made this fund a winner in the gilt medium- and long-term category in past one year. Canara Robeco Gilt (PGS) posted a 19.69% return. The portfolio managed the interest rate risk by maintaining a balance between short- and long-term maturity papers in last 1 year.