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Gilt funds stage a big comeback

It may not be the mother of all rallies, like the one in April this year, but the sharp spurt in gov

It may not be the mother of all rallies, like the one in April this year, but the sharp spurt in government securities has surely given a relief to gilt fund managers. With the sentiment buoyed by inflows of $5.5 billion on account of SBI's India Millennium Deposit issue, gilt funds have seen an average gain of 1.01 per cent for the fortnight ended November 10, 2000. Although the returns are clearly not sustainable, the 15-day gain translates into an annualised return of over 24 per cent!

The returns are all the more alluring, since they have come after a sustained round of bearish sentiment in the debt markets. Besides the government's large borrowing programme, a skittish rupee and rising oil prices had pushed up interest rates in the last few months, thereby badly bruising gilt funds in the process. For instance, when the RBI hiked interest rates on July 21 to defend the rupee, gilt funds had lost an average 0.76 per cent during the month. Thus, even as the current round of gains have come thick and fast, the average six-month return from gilt funds continues to be a poor 1.37 per cent (as on October 31, 2000).

Among the top gainers, the Provident Plan of JM G-Sec has posted a return of 1.54 per cent for the 15-day period while Templeton India Government Securities Fund (TIGSF) is a few notches below at 1.47 per cent. An aggressive G-Sec fund, TIGSF has hiked the average maturity of its portfolio from 4 years in September to over 6 years in October to capture the upside in gilt prices.

"Bringing $5.2 billion into the domestic money markets is almost equivalent to a CRR reduction of 300 basis points. However, these funds have the potential to fuel inflation by stoking up liquidity, and hence, RBI will try to mop up these additional funds by issuing government securities. This will also help the Central Government complete its FY01 borrowing programme without putting upward pressure on interest rates,'' Says Nilesh Shah, Chief Investment Officer at Templeton India AMC.

Encouraged by the comfortable liquidity in the system, most fund managers have turned bullish and thus, increased the maturity profile of their bond funds. "The interest rate scenario is expected to be stable with a bias towards softening of interest rates as we come closer to the completion of the government's borrowing programme,'' points out Sandesh Kirkire at Kotak Mutual Fund.

However, despite the roaring success of the IMD issue, skeptics remain and continue to maintain a cautious stance. "While we do not see any significant upside to interest rates in the near term, event based risks (like the mid east tensions) and the supply risks of G-Secs would prevent us from stretching duration to a large extent. Hence, we would maintain a cautious stance with a marginal rise in duration,'' counters Bharat Shah, CIO, Birla Mutual Fund.

The IMD Push
  Fund  (25/10/2000)  (10/11/2000)  % change
  Tata GSF 11.60 11.78 1.546778407
  JM G-Sec PF 11.52 11.70 1.544495349
  Templeton IGSF 10.28 10.43 1.469014496
  JM G-Sec Regular 11.40 11.57 1.455007893
  Pru ICICI Gilt Investment Plan 11.39 11.53 1.186537365