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Templeton India GSF may have taken high risks, but its returns have justified them. It is exceptionally suitable for investors who are willing to take a little bit of rough with the smooth over the long-term.

With a top quartile ranking for three successive years and consistently category-beating quarterly returns, Templeton India Government Securities Fund (TIGSF) usually gives tough competition to its rivals. High variability in performance is embedded in a typical high-performing gilt fund and TIGSF is no exception. But then, the fund adequately compensates investors for these risks.

Even though interest rates have generally travelled southwards over the last two years, there have been occasional sharp rises as well. Analysing the fund's performance during these periods justifies its high risk nature. Whenever interest rates fell sharply, TIGSF has been in the top quartile of its category. And whenever they moved up, the fund has promptly dropped to the bottom quartile. During May 2002 to January 2003, interest rates fell by nearly 2.56 per cent and TIGSF gained 24.97 per cent, trouncing 86 per cent of its 29 peers. When interest rates rose by 0.89 per cent during January 21 to February 14, TIGSF shed 6.14 per cent, trailing behind 75 per cent of its peers.

What makes for this extreme performance? A high average maturity. Average maturity measures the average time left till the maturity of the securities that make up a portfolio. TIGSF's average maturity has been higher than the maturity of an average gilt fund and thus positions the fund to gain more than its peers when interest rates rise and lose more when interest rates fall. However TIGSF does try to mitigate the risk by actively re-aligning the average maturity of the portfolio when needed. Anticipating an interest rate hike in third quarter of 2000, TIGSF brought down the maturity from 7 years in April to 4 years in June. Still, it couldn't completely escape the downfall during June and July. After that, as interest rates started their long southward march 2000, an above average maturity has been the norm with TIGSF.

While the fund has tried to limit maturity when interest rates rise, given the highly volatile nature of the underlying market, shorter maturity just reduces losses but doesn't eliminate them. TIGSF has been eminently suitable for investors who are willing to take a little bit of rough with the smooth and are not worried about staying invested long enough for the good times to outdo the bad.