• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

B. Venkatesh

K-Gilt Savings Plan (Growth) generated one-year holding period returns of 6.5 per cent. The returns compare well with short-term bank fixed-deposits.

The fund is suitable for those proposing to construct a bond portfolio consisting of income funds invested in short-and- medium-term corporate bonds, and gilt funds invested in long-term government bonds.

K-Gilt Savings Plan can enhance cash returns in such a portfolio; cash returns is the return one gets by keeping money in the savings account. Besides, such a portfolio will provide exposure to debt instruments in all maturity sectors.

Investors may consider the following factors before buying units in the fund: K-Gilt Savings Plan typically invests in short-term government bond, and the rest in money market instruments such as T-bills and call money.

The exposure to short-term government bond is likely to result in some fluctuation in the net asset value (NAV). This is because such bonds will be marked to market. The positive aspect of such an exposure is that the unit-holders may see higher returns if the market price of these bonds increase.

If income stability is more important, investors should prefer Templeton India Money Market Account, which invests only in T-bills and call money. The reason is that money market instruments are not marked to market.

The NAV will, hence, increase to the extent of the interest accrued on these instruments on a daily basis. Such a fund will behave in the same way as the cumulative fixed deposits with banks.

Then, the fund's asset base is less than Rs 10 crore. The small asset base exposes the fund to high level of non-diversifiable risk.

This is the risk of the NAV declining sharply because of overexposure to a single bond or maturity sector. In this instance, the fund has exposure in 2005 government bond.

Should that bond decline in value, the fund will be badly affected. Now, short-term bond prices will decline sharply when liquidity in the banking system is low, or when the Reserve Bank of India (RBI) decides to hike short-term interest rates, such as the repo rate.

Note that concentrated investments in money market instruments do not carry non-diversifiable risk because they are not marked to market.

That is why Templeton Money Market Account is a better investment option for the risk-averse investor wanting to enhance cash returns.

K-Gilt Savings Plan is, hence, suitable for only the risk-seeking investors wanting to construct a diversified portfolio of bond funds.

Article E-Mail :: Comment :: Syndication

Stories in this Section
What record FII flows mean for equities

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line