Some gilt funds are giving returns of 20 per cent

FUND QUERIES

With more Cash Reserve Ratio (CRR) and repo rate cuts, will it make sense to invest in gilt funds? 
-Sumeet Dalmia 

On any fixed income investment, whether it is a gilt or a corporate bond or even a fixed deposit in a bank, there are three types of risks. These are credit risk, liquidity risk and interest rate risk. A high credit risk means that a borrower would not be able to pay back an investment at all. 

In government securities, this risk is generally considered to be zero. In other types of fixed income investments, this risk is higher. In any economy, government securities are considered to be of the lowest risk. Therefore, a gilt fund has stood as a far safer investment avenue than others.

There is an inverse relationship between interest rates and prices of securities. This gets reflected in government bonds first. So if the interest rate goes down, the prices of bonds rise and vice versa.

Gilt funds could be an opportune investment for risk-averse investors, particularly when interest rates are likely to go down. Over the past one year, till October 24, 2008, medium- and long-term gilt funds have been the best performing category among debt funds. Some top-rated gilt funds are giving a return of over 20 per cent. 

How do Monthly Income Plans (MIPs) work? Can we consider these funds good for the short term?
-Shrinivas Joshi 

MIPs are debt-oriented funds with a little equity exposure. Typically, they invest 5-20 per cent in equities and he rest in debt (fixed income securities). Don’t be misled by their name, as the fund may not provide monthly income. These funds, based on their asset allocation, that is 80-95 per cent in debt and 5-20 per cent in equities, endeavour to provide a regular income. 

MIP is ideal for those investors who need periodic income from their investment with low downside and risk tolerance. 

From the same fund house, there are various MIPs available. Each of these MIPs has a different equity-debt allocation.For example, DSPML Saving Plus Aggressive, DSPML Saving Plus Conservative, DSPML 

Saving Plus Moderate have a maximum equity allocation up to 30 per cent, 10 per cent and 20 per cent respectively. The rest of the money is invested in debt. MIPs are not suited as a risk-free, short-term investment. 

Why is the Magnum Global Fund not declaring dividend every financial year? It does so only in alternate financial years, though the net asset value (NAV) is good. You have given a 3 star rating. Is something amiss when you compare this performance with its peer funds? Does it mean it generates distributable profit only once in two financial years?
-KRV Subramanian

The fund rating is based on the historical risk-free return from a fund relative to its peers. For calculating the return of any fund, we take into account the total return, which assumes reinvestment of any dividend.

Most funds offer two options – growth and dividend. In the growth plan, all gains and income to the fund accumulate and are reflected in the NAV. Magnum Global has been liberal with its dividend in recent years – 50 per cent in March 2007, 42 per cent in June 2005, 24 per cent in November 2004, 25 per cent in Jan 2004 and 10 per cent in November 2003.

I am a regular investor in fixed maturity plans (FMPs). I have the following queries: 

1. What does NAV of an FMP indicate? Is it the accrued interest income or the market value of the underlying securities? 

2. Is the dividend distributed similar to the interest payout of a bank fixed deposit (FD)? 

3. Why is the dividend a function of NAV in an FMP when the underlying securities are not traded? 
-R. Subramanian

The NAV of an FMP indicates the market value of its underlying securities and it may or may not reflect the accrued interest income.

Dividend from an FMP is similar to interest that banks give on FDs, but only to the extent of deriving return from an investment. Dividend from any fund is paid out of distributable surplus, that is, realised interest, dividend and capital gains. 

During 1990s, I had invested in some mutual fund schemes. I have been out of the country for the last seven years. I believe most of my funds are not active. Can you please let me know if there have been changes in names or a merger of one scheme with the other? Also, how do I redeem? Following are the funds that I had invested in: Unit Scheme 1992, Capital Growth Unit Scheme - 1992 (Master Gain 1992), Unit Growth Scheme 5000 (issued in1995), Master Equity Plan 1991, Unit Growth Scheme 2000.
-K M Sridharan

All the above schemes, barring UTI Master Gain 1992, have been redeemed. UTI Master Gain 1992 became an open-ended fund. Its name has changed to UTI Equity Fund since July 1, 2005. The NAV, as on October 27, 2008, is Rs 24.09. You can redeem this on any working day by filling the redemption application form and submitting it at the AMC's office. 

Following is the redemption date and the redemption price of expired schemes.