Irked by the roller coaster ride of gilt
funds, a section of investors in
these funds are an agitated lot in recent months. Gilt fund returns
have been no less volatile than those of equity funds and the plight of
investors who shifted their investments from equity to gilt funds
in the beginning of 2009 can be aptly described by the
cliché: "Out of the frying pan, into the
fire." In 2008, a year that saw most asset
classes wilt under the heat of a global financial meltdown, gilt funds were rated as
second best performing asset category, next only to
gold exchange traded funds which topped the return charts.
No wonder, lured by the superlative returns, many High Net worth Investors (HNIs)
joined the gilt fund bandwagon. Thanks to the huge government borrowing
program, most of these funds are now logging in negative returns as a result of
rising yields.
Before looking at the reasons behind the roller coaster ride of gilt funds in
recent months, let's get into the nitty-gritties of these funds. Unlike the
traditional debt funds which invest in debt instruments across the board,
gilt funds are mutual funds which particularly invest in Government
securities (G-secs or Gilts). Indeed, gilts are
bonds issued by RBI on behalf of Government of India
(GoI) which uses these funds to meet its expenditure commitments.
Predominantly, entities such as banks, insurance companies, and provident
funds prefer to invest in gilts for safety and statutory reasons. Thanks to the
availability of a large number of participants and long tenure
issues, along with near-zero risk, a vibrant secondary
market has developed in gilts too. Nevertheless, the ample liquidity in turn spikes
the volatility for gilts in the market.
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