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Templeton India Government Securities Fund

The windfall gains in TIGSF may be tempting but consider the volatility associated with gilt funds before taking the plunge

For Templeton India Government Securities Fund (TIGSF), nimble-footed management has been the key to bounty gains. Not many funds will give you a two-year return of 18.86%, but TIGSF has precisely done that by aggressively leveraging falling interest rates in its favour. In the process, it has even beaten most equity funds hollow. The quarterly dividend plan of the fund has paid consistent dividends - 8 in all aggregating to 20%, since launch in June '99.

Yet, these returns have come with their fair share of volatility, typically embedded in a gilt fund. While TIGSF carries practically nil credit risk, investment in government bonds makes it highly sensitive to interest rates and places it in the high-risk, high return bracket.

By virtue of their high liquidity, government bonds sharply reflect any movement in bond markets. Bonds gain value when interest rates soften and vice-versa and longer maturity instruments more susceptible to interest rate changes. The fund, on its part, has handled interest rate risk by actively re-aligning portfolio maturity in line with interest rate outlook. While the fund held its portfolio maturity at a conservative 2.51 years in July '00 when interest rates had hardened, it has today stretched it to 11.08 years to capture the gains of the current rally.

With active management, the fund has been an above average performer and consistently outperformed its category to post a return of 18.37 per cent since launch. However, the impressive performance is on the back of a not a very smoothly rising performance as the risk grade suggests. With its high risk - high return complexion the fund is meant only for long-term fixed-income investors.