This open-ended scheme intends to generate returns by investing in central and state government securities. They carry a sovereign guarantee that insulates them from a default on principal and coupon payments. Given the continuous increase in interest rates by the Reserve Bank of India over the last one year to tackle inflation, short-term interest rates have increased substantially from the year ago period. However, when the rates begin their decline after peaking, gilt funds would benefit, as bond prices and yields share an inverse relationship. Thus, when government bond yields fall, these prices would rise and impact the gilt fund returns positively.
The fund has outperformed its peer group over a one, two, three and five year time-frame. It has outperformed its benchmark (I-Sec Li-Bex) over two and three year time-frames. Over a two-year period, the fund gave a compounded annual growth rate of 8.15 per cent as against 4.68 per cent of the benchmark and 3.18 per cent of the peer group. Over a three-year period, the fund returned 12.82 per cent annualised, as against 8.13 per cent of the peer group and 10.56 per cent of the benchmark, respectively. A sum of Rs 1,000 invested in the fund from March 31, 2002 would have returned Rs 2,025 as on June 30, 2011. A similar investment in the benchmark and the peer group would have returned Rs 2,019 and Rs 1,907, respectively.
The fund has followed a dynamic strategy of managing interest rate risk in relation to the category peers. It was observed over the last 36 months, the average maturity varied from one day to 9.55 years. At the category level, the average maturity varied from two years to 14.5 years over the same period. Typically, longer duration (higher average maturity) government securities are marked-to-market whereas shorter duration securities are treasury bills, bought at a discount and redeemed at face value. As bond prices rise when yields fall, it benefits higher maturity government bonds that are marked to market. Vice versa, when yields rise, short-maturity securities benefit as they are redeemed faster, thereby giving higher returns commensurate to the yields.
It is important for investors to look beyond the returns while selecting funds. Thus, portfolio attributes play a crucial role in fund selection. In the case of gilt funds, Crisil mutual fund ranking methodology looks at liquidity, average maturity and asset quality, besides risk-adjusted returns.
Crisil measures liquidity of the gilt securities based on three parameters – turnover of the security, the number of days for which it is traded, and the number of trades that took place for the security during the quarter. In the latest ranking of March, the fund is in the top cluster on all the parameters (both risk-adjusted returns and portfolio-based).
— Crisil Fund Services
