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B. Venkatesh

TEMPLETON India Government Securities Fund (Growth) is suitable only for those who have sizable investments in bonds. The reason is that the fund primarily carries exposure in long-term bonds. Those who limit their bond investments to this one fund will, therefore, be subject to high risk because long-term bonds tend to be very volatile.

Investors may consider the following factors before buying units in the fund: The high exposure to long-term bonds has its pros and cons. On the positive side, long-term bonds gain most when bond prices rise.

The flip side is that such bonds decline the most when the bond market dips. This injects high degree of volatility to the net asset value (NAV); the fund lost 2 per cent this January but generated a 2 per cent gain the next month.

Then, the fund actively manages portfolio duration. A duration of, say, 7.95 means that the fund's NAV will change by 7.95 per cent if the yield on all bonds in the portfolio change by one per cent. Now, the fund actively manages duration by shifting between medium- and long-term bonds; the latter carries higher duration than the former.

In March, for instance, the fund had an exposure of 45 per cent in medium-term bonds. It has since reduced its exposure to less than 5 per cent. Actively managing portfolio duration cuts both ways. If the fund shifts from medium-term to long-term bonds just when the latter is poised for a rally, gains for the unit-holders will be higher. The flip side is that unit-holders will suffer higher losses should the fund move into a sector that is poised for a dip. In short, market timing is of essence. If monthly return in the last year is any indication, the fund has been fairly successful in its strategy.

Finally, the fund caters to both wholesale and retail investors. It has to, therefore, balance between impact cost and cash drag. Impact cost refers to the decline in bond prices, as a result of the fund being forced to sell some of its holdings to meet large redemptions from wholesale investors. And cash drag refers to lower returns because the fund maintains sizable cash/cash equivalents in anticipation of such redemption requests.

In short, the downside is high, as is the upside. A combination of this fund, an income fund that primarily concentrates on corporate bonds, and a liquid fund with exposure to T-bills and calls would enhance diversification benefits, as it will give the investor exposure across the yield curve.

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