The Hindu Business Line : Should I quit gilt funds?

Rs 50,000 in Prudential ICICI Gilt Fund and Rs 1.50 lakh in Templeton India Government Securities Fund. As the absolute return on the above schemes is just above 4 per cent, please recommend alternative options, preferably from the same fund houses.

I would like funds with a consistent return record and safety of capital.

Paresh Thakkar

Mumbai

You can bump up the returns from your debt investments to about 5-6 per cent by switching your investments into floating rate or liquid funds from the same fund house.

A much higher return does not appear possible for a risk-averse investor in the present interest rate scenario.

Within Prudential ICICI, you could consider investing in PruICICI Long Term Floating rate Fund and within Franklin Templeton, you could go for Templeton Floating rate Fund or the Templeton Money Market Account.

Returns from gilt funds are starting to improve, as fund managers have rejigged their portfolios to handle a firm interest rate scenario.

However, under present conditions, "accrual" products such as floating rate funds and liquid funds may be better options for investors who are averse to volatile returns.

Such products invest in a combination of short-term debt from the government as well as the corporate sector. They have the flexibility to switch between the two classes to maximise returns.

Until about two years ago, gilt funds managed returns of 10-12 per cent, as declining interest rates contributed to steadily rising gilt prices, ensuring appreciation in the NAVs of funds invested in long-term gilts.

When interest rates flattened out, returns on these funds dwindled, with many even registering negative returns.

Over the past year, gilt funds have made a comeback and are now beginning to generate positive returns. Fund managers have allocated a larger proportion of their portfolio to short- and medium-term bonds in order to reduce volatility.

However, most fund managers now forecast a steady or even rising interest rate scenario.

In these circumstances, floating rate funds and liquid funds are likely to outperform the rest of the debt pack.

These funds earn the bulk of their returns from the interest payments they receive on the securities they hold in their portfolio and relatively little from swings in bond prices. Hence, they also ensure lower volatility in your returns.

You can bump up those returns to a level of 10-12 per cent, if you are willing to allocate a portion of your portfolio to equity investments.

Since safety of capital is a priority with you, we are not recommending any equity or hybrid funds at this juncture.

After the sharp run up in equity values over the past two years, equities do carry downside risk and would not ensure safety of capital.

Queries may be sent to: mf@thehindu.co.in or by post to Q&A, Business Line, 859/860, Kasturi Buildings, Anna Salai, Chennai - 600 002.

Aarati Krishnan

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