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Gilt, debt funds record sharp gains

Aabhas Pandya

Thanks to the cut in cash reserve ratio, or CRR, and bank rate on Saturday, gilt and debt funds invested towards the long-end of the market have delivered stupendous returns.

Debt securities recorded sharp gains on Saturday and Monday after the rate-cuts announced by the Reserve Bank of India, with long-dated gilts gaining Rs 2 to 2.5 at an average.

The growth option of the Templeton India Government Securities Fund, or TIGSF, was the top gainer, moving up by 2.45 per cent from Rs 11.27 on March 29 to Rs 11.54 on April 3.

Although these returns are not sustainable, for the statistically inclined, this translates into an annualised return of a whopping 223 per cent.

Little wonder then that TIGSF has been the top performer since the average maturity profile of its portfolio is 8.61 years! As on February 29, 2000, 70 per cent of the fund's portfolio is invested in securities with a maturity profile of over 5 years.

The gilt fund from Alliance Capital has also performed well, registering a gain of 2.40 per cent in its long-term investment plan while the NAV of Prudential Gilt Fund jumped by 2.17 per cent in the four-day period.

The best performing debt fund in the wake of the cut in CRR and bank rate has also belongs to Templeton. Templeton India Income Fund, or TIIF, gained 13 paise or 1.24 per cent at Rs 10.61 on April 3.

As on February 29, 2000, TIIF had a 50 per cent exposure to gilts. This explains why the fund has topped the chart of medium-term debt funds.

Sundaram Bond Saver, the debt fund from Sundaram Newton, has also gained 12 paise or 1.16 per cent to Rs 10.44. The fund had around 30 per cent of its corpus invested in government securities in mid-March.

In fact, a number of debt funds had moved to gilts in late 1999 since the spread between a triple A corporate paper and gilts of similar maturity had shrunk to as low as 50 basis points.

Second, there was a steady decline in interest rates. Since gilts are the most liquid debt instrument, it is impacted the maximum in the event of a change in interest rates.

Meanwhile, on Tuesday, the rally in gilts showed signs of tapering off since there was heavy selling by primary dealers.

"The sentiment was good but primary dealers, or PDs, were offloading with every rise in price. This prevented a sharp rally," said a fund manager.

"There is profit-booking by PDs since they were net buyers in March. Also, they are making room for the first auction of the new fiscal, which is expected this week," he added.

Fund managers say if the government enters the market this week for borrowing, it will impact sentiment and prevent any sharp rise in gilt prices.

"With an auction every week, we will see gilts in a trading zone with some gains to make every week throughout the year," pointed out a fund manager.

Mutual Funds

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