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Templeton India Government Securities Fund

With its long term interest rate bets, TIGSF is well suited for long-term investor seeking above average return from a pure g-sec portfolio, but not ideal as a core bond fund.

Templeton India Government Securities Fund (TIGSF), the largest government securities fund with an asset base of Rs. 460 crore was launched in June-1999. The fund has delivered a handsome return of 18.04 percent since launch, with its best one-year performance of 26 per cent ending September 9, 2001 in recent past.

All medium and long-term government funds have posted strong gains over the last year. The top fund in the group outperformed the bottom funds by more than 30%. This gap is largely due to the duration of the bonds that the various funds owned. Those that own bonds with longer-than-average duration tend to outperform their peers when interest rates fall and under-perform when rates rise.

And the fund has been aggressive on its duration bets. For example, in June 2001, anticipating an interest rate cut, the average of the 22 gilt funds portfolio maturity was 7.67 years, while Templeton India Government Securities Fund had stretched the longest -- 11.08 years. And the fund gained most -- 2.37 percent during the month against its peer's average of 2.13 percent. For this reason, TIGSF has been among the best performer even in the current year. Capitalising on the falling interest rates with an aggressively stretched portfolio, the fund has posted 18.78 percent return as against the average peer's return of 16.50 percent on year-to-date 2001.

But these returns come with intermittent volatility, typical of a gilt fund. Apart from lofty gains during the falling interest rates, the government bonds decline when rates go up. And in early 2000, the fund was able to spot the interest rate hike. It pruned its portfolio maturity from 7.33 years in early 2000 to 2.09 years in July. Although the fund was hurt the least, but massive portfolio adjustments make the fund turbulent.

This fund's extreme sensitivity to fluctuations in interest rates makes it a volatile vehicle, despite its focus on government bond with no default risk. It's a well-run fund and suited for investors seeking above average return from a government bond portfolio over long-term, but not ideal as a core bond fund.