Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
2Activity
0 of .
Results for:
No results containing your search query
P. 1
How to Invest in Gilt Funds?-VRK100-18Aug2012

How to Invest in Gilt Funds?-VRK100-18Aug2012

Ratings: (0)|Views: 38|Likes:
Rama Krishna Vadlamudi, Hyderabad, has comprehensively analysed the returns of gilt mutual funds in India. He has zeroed in on two gilt funds for consideration. Please read on to find out the Best Gilt Funds.
Rama Krishna Vadlamudi, Hyderabad, has comprehensively analysed the returns of gilt mutual funds in India. He has zeroed in on two gilt funds for consideration. Please read on to find out the Best Gilt Funds.

More info:

Published by: RamaKrishna Vadlamudi on Aug 18, 2012
Copyright:Attribution Non-commercial No-derivs

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

09/04/2012

pdf

text

original

 
 
Rama Krishna Vadlamudi, HYDERABAD 18 August 2012 
www.ramakrishnavadlamudi.blogspot.com 
The author is happy to inform the blog readers that he completed Level 2 of Charatered Financial Analyst (CFA)Program from the CFA Institute, USA, a few months back.
SUMMARY:
Different asset classes give different size of returns depending on the time periods.In the Indian context, common stocks provided fabulous returns between 2003 and2007. Gold and other commodities have been giving hefty returns since 2003.Stocks of consumption-oriented and pharmaceutical companies have been doingwell since 2008 and real estate too has given sturdy returns in the last decade.
Now the time has come for Indian investors to forecast that interest rates will fall eventhough predicting interest rate movements is difficult. The probability of interest ratesgoing down is very high considering the slide in GDP figures.Despite the entrenched inflationary pressures, rising fiscal deficit, deficient South-Westmonsoon and global headwinds, the Reserve Bank of India in all probability is likely toreduce its benchmark interest rates in the next few months. India’s new finance minister,Mr P.Chidambaram, seems to be veering round to the view of lower interest ratesstimulating GDP growth.All these developments point to a softer interest rate regime, which will trigger a rise inbond prices. If investors are of the same opinion, they can consider investment in giltmutual funds that invest predominantly in government securities of longer maturity.Two gilt funds I have zeroed in, after extensive research, are:1. Birla Sun Life Government Securities Fund Long-Term, and2. Kotak Gilt Investment Regular.These funds are of low-risk category and they invest mainly in government securities.Due to their exposure to government bonds, they bear no default risk but they carryinterest rate risk, the risk that bond prices may fall when interest rates rise. Please read onthe full article…
 
 
Rama Krishna Vadlamudi, Hyderabad 18 August 2012 www.ramakrishnavadlamudi.blogspot.com 
Page 2 of 6 
What are Gilt Funds?
Gilt funds are debt mutual funds that invest mostly in Government securities and a smallportion in short-term money market instruments. Government securities (hereinafterreferred to as G-Secs) are bonds issued by the Central Government and StateGovernments – they carry sovereign guarantee. Basically, government securities arepromissory notes issued by a government for raising money. Because they are guaranteedby the government, they are known as gilt-edged securities or simply gilts. The majorinvestors in G-Secs are banks, insurance companies, RBI and primary dealers.Gilt funds keep a small portion of their funds in money market instruments (that offerhigher liquidity), such as, commercial papers, certificates of deposit, call money, CBLO,or treasury bills. Keeping certain amount in money market papers enables the gilt fundsto meet investor redemptions, make profitable investments in attractive papers and takebets on G-Secs depending on the market conditions.
What are the Best Gilt Funds?
Indian investors have a wide variety of debt mutual fund options. Gilt funds are a type of debt mutual funds. My research on the gilt funds available in India shows that investorscan consider the following gilt funds for investment depending on their investment needs,risk appetite, time period and availability of surplus funds:
1. Birla Sun Life Government Securities Fund Long-Term:
Present NAV is Rs 31.99 (growth option)Latest AUM is Rs 306 crore
2. Kotak Gilt Investment Regular:
Present NAV is Rs 37.96 (growth option)Latest AUM is Rs 152 croreYou may see Appendix I for full details of the above schemes and other gilt funds. Thegilt funds given in the Appendix I typically invest in long-term bonds. Prices of long-term bonds are more sensitive to interest rate changes than prices of short-term papers.As such, long-term bonds gain the most when interest rates fall. On the contrary, if interest rates rise, the prices of long-term bonds lose more compared to short-term bonds.If you want to read more about government bonds, just click:http://ramakrishnavadlamudi.blogspot.in/2009/12/government-securities-market-in-india.html It is not advisable to invest in gilt funds that have very low AUMs. Some gilt funds arehaving meager AUMs of Rs 10 crore or even Rs 1 crore .
 
 
Rama Krishna Vadlamudi, Hyderabad 18 August 2012 www.ramakrishnavadlamudi.blogspot.com 
Page 3 of 6 
What are the Risks involved?
If I say government bonds are risk-free, it is only a half-truth. G-Secs do not carry anydefault risk, which means that the chances of losing one’s money in G-Secs arepractically zero. However, their market prices are likely to fall now and then dependingon the interest rates (interest rate risk). Market prices of G-Secs are influenced by risingor falling inflation, interest rates, growth numbers of GDP/IIP, crude oil prices, liquidityavailable with banks, RBI’s open market operations and government’s marketborrowings.Because gilt funds predominantly invest in G-Secs, the net asset value (NAV) of a giltfund is also susceptible to above mentioned factors. The returns of gilt funds also dependon the fund managers’ ability to predict the interest rate movements. Safety of principalin a gilt fund is, more or less, guaranteed if an investor is able to hold the fund till thematurity of the underlying instruments.To know more about bond risks, just click:http://ramakrishnavadlamudi.blogspot.in/2009/12/bond-basics-all-you-wanted-to-know.html
 
Past Returns of Gilt Funds
The returns provided by gilt funds between 2000 and 2003 are the best returns in its classso far. For the first time in the last two decades or so, interest rates started falling in July2000 once the BJP-led NDA government decided to cut interest rates by announcing asubstantial reduction in interest rates of PPF, NSC, KVP and other instruments.The benchmark 10-year G-Sec yield fell from a level as high as 11 per cent in 2000 to aslow as 5.1 per cent by the end of 2003. The steep fall in yields resulted in gilt fundsmaking windfall profits in their G-Sec portfolio. Even banks made substantial profits intheir G-Sec portfolios during that time. It may not be irrelevant to recall that this low-interest rate regime had triggered massive investment boom by Indian corporates that hadcontinued till 2007/2008. Thanks to the Vajpayee government!After the collapse of Lehman Brothers, gilt funds once again delivered excellent returns.Interest rates in India had undergone a steep fall between September and December 2008.During that short period of four months, many gilt funds delivered spectacular returns of 20 to 35 per cent.The flip side is that gilt funds can lose money in the short-term. Many gilt funds lost 5 to12 per cent of their value during the January-March 2009 quarter. However, investors canrecoup their money provided they are able to hold their units for another two to fourquarters. (See Appendix II for more information).

Activity (2)

You've already reviewed this. Edit your review.
1 hundred reads
RamaKrishna Vadlamudi added this note
This article "How to Invest in Gilt Funds" can also be read at http://ramakrishnavadlamudi.blogspot....

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->