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B. Venkatesh

K-GILT Investment Plan (Growth) generated a three-year annualised return of 20 per cent. The annualised return does not, however, capture the high fluctuation in the monthly risk-adjusted returns. Despite this, the fund may be suitable for investors who prefer to build a portfolio of bond funds.

Portfolio: The fund follows tactical asset allocation strategy. That is, the portfolio manger shifts between long-term (maturity higher than 10 years) and medium-term (maturity between 5 and 10 years) government bonds based on his view of price movements.

The fund, for instance, had 88 per cent exposure in long-term government bonds in April 2003. It cut this exposure to 25 per cent in July 2003, but has since increased it to 63 per cent. Such an asset allocation strategy will earn unit-holders high returns if the portfolio manager times the market well.

The tactical asset allocation strategy can, hence, lead to high fluctuation in monthly returns. The fund, for instance, generated 2.30 per cent returns in May 2003, when it increased its average portfolio maturity from 7.4 years to 14.70 years.

Yet, the fund was able to generate just 0.63 per cent returns the next month, when it cut its portfolio maturity to 6.89 years. This shows that the fund has not been continually successful in timing the market. In fact, though the fund generated losses in only four of the last 20 months, the monthly risk-adjusted returns have been low in many months. But that is the risk investors have to assume in buying units in this fund.

Finally, the asset base of Rs 343 crore suggests that it caters primarily to retail investors. The fluctuation in monthly returns will be that much higher if the fund also catered to institutional investors; such investors typically move in and out of the fund at short intervals.

In the light of the above factors, the fund is suitable for investors who construct a portfolio of bond funds. K-Gilt Investment Plan can enhance returns in a portfolio that comprises funds that invest primarily in corporate bonds; and money market instruments.

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