Last month, we carried a news report (Gilt Funds Shine) on the excellent performance of gilt funds and how the stock market turmoil and liquidity crisis worked in favour of these funds.
So while fund houses had to deal with an overall decline in assets (Fund Assets Go South) in October, this category of funds witnessed fresh investments to the tune of Rs 1,350 crore. The major beneficiaries were the short-term gilt funds. The latter, which held merely Rs 501 crore as assets (September 30, 2008), saw its AUM blow up to Rs 2,019 crore (October 30).
Birla Sun Life Mutual Fund collected Rs 795 crore through fresh inflows, Kotak Mahindra Mutual Fund added Rs 325 crore and IDFC Mutual Fund, Rs 110 crore. All these inflows were into the gilt funds.
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. The 10-year benchmark yield slipped from 8.64% to 7.45% (September 29-October 31, 2008). As the prices of G-Secs went up, the monthly return posted by long-term gilt funds in October was nearly 4%, the highest ever since November 2001.
ICICI Prudential Gilt Investment PF and Canara Robeco Gilt (PGS), both long-term gilt funds, delivered returns above 20% (1-year returns as on November 12, 2008). While the short-term category of gilt funds had ICICI Prudential Gilt Treasury PF and ICICI Prudential Gilt Treasury as the best performers, each delivering over 9%.