Safe At Any Price
In his well-known book, A Thousand Miles from Wall Street, Anthony R (Tony) Gray, the renowned US investor who manages 1.5 billion Pension Funds' assets in the Sunbank Capital Management Company, stressed the home-truth; "you have to realise that nothing is perfectly safe"!
And this indeed marks the subtle and yet well-defined distinction between an investment and a deposit. However, the concept of safety is deeply ingrained in the Indian psyche, for the investor has but recently graduated from the "piggy-bank" depositor's mentality to get a taste of equity.
But the appetite for return is determined by his capacity for risk. For risk-averse investors, gilt funds are ideal since the proceeds are deployed in government securities and offer full assurance on the repayment of the principal and interest in time.
This aspect assumes much greater importance in the context of the volatility of the capital market when the newly cast Sensex crashed by 292 points on a single day on Black Monday April 17 _ largely owing to the nose-diving prices of information technology, communication and entertainment (ICE) stocks on NASDAQ. Market capitalisation was eroded by Rs 50,000 crore. Even now the bourses are highly volatile.
Dated securities are auctioned and the minimum investment is notionally fixed at Rs 10,000, but no individual investor ever bids. These are invested by companies, banks and financial institutions _ and now recently by the mutual funds, too. There is the element of price risk, for these are actively traded. Unlike the western bourses where it is relatively easier to gauge interest movements, the securities market in India is extremely volatile _ it is more rumour-driven than a casino.
On the other hand, the high liquidity offers ample arbitrage opportunities, which was hitherto restricted to the privileged few. The credit policy announced by the Reserve Bank of India (RBI) on April 27 has also helped the gilt markets in liquidity and settlement.
Now mutual funds, too, have entered the area to enable retail investors to participate in the markets in a bigger way. Kotak Mahindra in the private sector took the lead in December 1998 with K Gilt, Unit Trust of India (UTI) followed by launching E.sec Fund between August 23, 1999 and September 4, 1999, followed by ICICI Prudential, Life Insurance Company of India Mututal Fund (LICMF) (November 15 to 29, 1999), Birla Gilt Plus (September 23 to October 11, 1999), Kothari Pioneer and others. Now, there are 42 schemes out of which about 20 were launched towards the end of the year 1999. It is not possible to discuss each in detail.
However, UTI has already garnered Rs 488 crore, while LICMF Rs 72.42 crore. K. Gilts' corpus stands at Rs 453.20 crore, while that of Birla Gilt Plus at Rs 88.82 crore.
Some of the common characteristics are :-
* These are open-ended schemes with the sale and repurchase price determined by the net asset value (NAV) calculated every day.
* These are open to both resident and non-resident Indians.
* Apart from individual investors, even institutions, trusts and charitable and scientific bodies are qualified to invest.
* The minimum investment in most funds is Rs 10,000. For ICICI Prudential it is Rs 25,000 well beyond the reach of the common man, while Birla Plus has lowered the limit to Rs 3,000. There is no ceiling on the maximum.
* All schemes have both the dividend and growth options. In the latter the dividend gets automatically reinvested.
* Dividend is extempted from Income tax under Section 10(33) of the Income tax Act 1961. Capital gains on redemption attract the prevailing tax laws with the benefits of indexation.
* Since the schemes are dedicated exclusively to invest in the government sector, the funds may apply to the Reserve Bank of India (RBI) for availing of liquidity support up to 20 per cent of the outstanding value of the schemes investments in government sectors (as of the preceding monthly end).
* Most funds have innovations in investment periodicity. For instance, Kotak Mahindra and UTI offer a periodic Investment Plus in which an investor after an initial investment of Rs 10,000 can put in Rs 1,000 every month.
* Funds deploy the proceeds in short-term securities including treasury bills (below one year), medium term (between one to three years) and long term (five years or more). The last one is suited for non-government provident funds, gratuity funds etc. Birla Plus has clearly spelt out the options to investors to choose the plan: Liquid (short term), Investment (medium term) and long-term respectively. ICICI Prudential has two such options: Treasury Plan up to three years and Investment Plan beyond three years and up to eight years.
Gilt Funds are not for the short-term. Investors should realise that there are inherent risks in derivatives trading. The major risk, of course, is that of the change in the interest rates. In a falling interest ratio scenario, gilts are favoured. RBI has already fixed the yield to maturity (YTM) on 10 year paper at 10.85 per cent on April 10 this year as compared to 11.99 per cent previously. But one wonders how long the low interest rates would continue when they are rising the world over.
It is difficult to judge the performance of a particular fund vis-a-vis another. NAVs are more or less ranging in the same order from Rs 10.35 to Rs 10.88 with minor differences in the decimal points, which may not overly worry investors. LICMF's interim dividend of 2.5 per cent need not get them carried away either. On the other hand, UTI with its larger resources at disposal and the requisites expertise to monitor the complex market mechanism on an hourly basis is apt to perform better. Kotak Mahindra's K Gilt has the advantage of being the pioneer and the extra experience of a year, apart from the large corpus. Obviously these too offer the best options.
However, in managing these funds a much higher degree of transaparency is always desirable. The M&G Gilt and Fixed Income Fund managed by the reputed UK Unit Trust (as the mutual funds are known there) distributes dividends quarterly and publishes not just the NAV and the portfolio composition but also names of the trustee, the auditor and the investment manager to lend a much higher degree of credibility. No wonder the fund has the corpus of nearly