Among the different categories of mutual fund schemes in India, long-term gilt funds have been the worst performers in the last one year.
Among the different categories of mutual fund schemes in India, long-term gilt funds have been the worst performers in the last one year.
Over the last couple of years, debt investors have preferred to park their money in floating rate schemes and shorter term schemes.
Money is flowing out of gilt funds and long-term debt products as can be seen from the shrinking fund size of these funds.
SBI Magnum Gilt - Long term plan too has witnessed erosion in capital — it currently manages a corpus of Rs 217.16 crores, which is a reduction of around 42% compared to June 2006.
The scheme has generated meagre returns of 4.74% in the three-year period. It has been in existence for more than six years and has grown at a compounded annualised rate of 8.94% since inception.
The scheme has invested 55.49% of its assets in long-term gilts and 11.61% in treasury bills. A small portion of the assets is invested in term deposits, and the rest of the assets are parked in cash and equivalent.
Expectations of a pause in the series of interest-rate hikes by the Reserve Bank of India (RBI) and abundant liquidity in the system have boosted the fund manager’s confidence.
The scheme has hiked its exposure to long-term papers sharply during the last quarter — it had only around 20% exposure to government securities in May 2007.
The scheme has underperformed its benchmark - I-Sec Li-Bex — by a huge margin. It has generated returns of 6.63% in the last one year, against benchmark’s 8% returns.
The average maturity of the scheme as on July 07 is 17.09 years, which has gone up significantly because of the schemes investments in long-term papers. It has an exposure of 52.8% in the 8.33% GoI 2036 paper.
Prior to the pause in the interest rate hikes by the central bank, there had been a short rally in the debt market and yields had softened a bit.
However, RBIs efforts to drain excess liquidity in the banking system have made market participants cautious.
Though inflation has slipped into a range that is considered to be comfortable by the RBI, the central bank is keeping a close watch.
Against this backdrop, Gilt funds are not suitable for investors who seek stability in returns as long-term securities are more volatile than near-term papers.
By arrangement with mutualfundsindia.com, a unit of Icra Online
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