The Hindu Business Line : K-Gilt Investment Plan: Invest

K-GILT Investment Plan (Growth) generated an annualised return of 19 per cent in the last three years. The fund invests primarily in medium- and long-term bonds.

This increases the downside risk for investors whose exposure to bonds is restricted to this fund. K-Gilt Investment is better suited for investors having a portfolio consisting of other bond funds that primarily invest in corporate bonds and money market instruments.

Investors may consider the following factors before buying units in the fund: The fund's investment strategy leads to high fluctuations in monthly returns. Why? Long-term bonds generate maximum returns when the bond market rallies.

The flip side is that such bonds decline the most when prices dip. This translates into high volatility in monthly returns. The fund, for instance, gave 3.6 per cent returns in December last, but lost 1.65 per cent the following month.

The volatility in returns apart, the primary risk for the unit-holders is the fund's active portfolio management. The fund had, 89 per cent exposure in long-term bonds at the end of May 2003. It cut this exposure to 41 per cent by end June, and moved 44 per cent of its assets to cash equivalents.

Such active management of portfolio suggests that the fund's strategy is to time the market. The positive side is that the fund can generate high returns if it times the market well. It could, for instance, move from medium-term bonds to long-term bonds just when the latter is poised for another rally. The flip side is that losses will be very high if the portfolio manager's view does not materialise. Based on the monthly returns since last April, the fund has been fairly successful in timing the market.

It has generated negative returns in only three out of the last 12 months. One reason for the success has been that bonds across all maturities have been rallying in the recent past.

The fund's ability to time the market will be, therefore, subject to severe test when select maturity sectors behave quite differently from the other sectors — when medium-term bonds rally, for instance, with short- and long-term bonds declining in value. Investors need to accept the active risk if they seek higher returns.

In all, given its portfolio strategy, the fund will provide good diversification benefits for investors who also take exposure in other bond funds that primarily buy corporate bonds and money market instruments. Such an investor-constructed portfolio would have exposure across the yield curve.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Varishtha Pension Bima Yojana — Reason to smile for pensioners

Chevrolet Optra: Luxury redefined

AirTel One State, One Rate scheme

BPL announces mobile offer in Kerala

International calling cards

AirTel long-distance calling cards

Ten-year returns from stock market: Buy-and-hold may not always work

Difficult to avoid entry-exit pitfalls

Include stocks to deliver pension

Car sales — On the fast track

Bull market — Sense from SEBI, for now