Are you wondering why is it that a fund with an impeccable track record manages only a 3-star? Well, that's because the rating looks at how risk-prone the fund is. The higher the risk, the lower the rating. If you can ignore that then it's a fund you can tango with. Ignore you should, suggest financial whizes. Risk, they say, is something that investors have to accept now. Times of assured or safe returns are on their way out. Also, if you want the highest return on your investment, you will have to increase your risk appetite. Perhaps that's what guides this fund.
Launched in August 1999, Tata GSF (Growth) is one of the best performers in the gilt medium and long-term category. Its annual returns rank in the group's top 20%, while its risk scores have consistently been on the higher side. That's why the fund is more susceptible to interest rate changes than its average peer.
Tata GSF (G) makes up for its highly volatile demeanour by rewarding handsome long-term returns to investors. Indeed, its 2-year trailing return (18.51%) ranks in the category's upper echelons. What has helped the fund offset risks is its timely adjustment of the maturity profile and its astute security selection, which, in turn, has helped it pip its rivals to the post. Case in point: the fund mostly invests in actively traded government securities. Since they are highly liquid, it provides enough room to the fund to modify its portfolio maturity in line with market conditions.
Since rising interest rates destroy the value of a gilt fund, this fund turned conservative in July 2000 when the bank rate went up from 7% to 8%. Hence, it parked 36% of its assets in cash and another 20% in treasury bills. And during October 2001, when bank rate was cut by 50 basis point, the fund's lengthy duration gave it a big lift. Since the impact of interest rate cut is more pronounced on the long end of the curve, Tata GSF (G) actively realigned its average maturity from 8.69 years in August 2001 to 15.84 years in October 2001. Currently, the fund maintains an average maturity of 10.07 years. Incidentally, unlike other funds Tata GSF's growth option is managed differently from its dividend option. (In a sense, it means two different funds considering both, for instance, have different portfolios).
Tata GSF (G)'s year-to-date return of 3.30% places it on a firm footing in its category. Discounting its volatile nature vis-à-vis its average medium and long-term gilt peers, this fund has several pluses to its credit. Solid returns and a dynamic approach make Tata GSF (G) a prudent choice for investors with a long-term investment horizon.
This article was originally published on May 21, 2002.
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