The Hindu Business Line : Sundaram Gilt Fund: Sell/Avoid fresh exposure

SUNDARAM Gilt Fund (Growth) returned 7.5 per cent since last November. The returns are not commensurate with the associated risks. Existing unit-holders can consider redeeming their units, while others can avoid taking fresh exposures.The recommendation is based on the following factors:

First, the fund's asset base has gradually shrunk in size, and currently stands at Rs 5.67 crore. The low asset base is disadvantageous to unit-holders. Because of the high tradable value in the bond market, the fund is forced to invest its corpus in just two bonds. This denies investors the benefits of diversification. The unit-holders are, therefore, subject to more risk than a fund that is invested across the yield curve.

Second, there appears no advantage in investing in short-term bonds (bonds with maturity of not more than five years). At present, bond investors are shifting to long-term bonds to benefit from the higher coupon rates these bonds offer.

This has resulted in less demand for short- and medium-term bonds. The implication is that the appreciation in short-term bond prices from the current levels is unlikely to be higher than long-term bonds.

Third, the risk associated with the investment is very high. Such high risk makes the fund unsuitable for retail investors who are looking for steady returns. True, government bonds are known for their volatility. But the fund's portfolio risk appears to be high. And the returns are not commensurate with the associated risks.

Fourth, the fund has followed a buy-and-hold portfolio strategy. A look at the month-end portfolio since this April suggests that the fund has continued its exposure in 2-year and 5-year bonds. The only change has been the asset-allocation between the bonds and call money; from a low of 84 per cent in April, the fund's exposure to these two bonds increased to 95 per cent in September.

In a highly volatile market, where demand for bonds of specific maturity sectors keeps changing, such buy-and-hold strategy may not be beneficial to the unit-holders.

True, the focus on short-term bonds constraints the fund's portfolio strategy, as they are few liquid bonds available in these maturity sectors. But that is no comfort for investors looking for returns commensurate with the associated risks.

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