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Commentary

Gilt Funds: An update

After I first wrote a post about buying Gilt funds, I went through a harrowing experience with Sharekhan + Franklin Templeton, which resulted in my money being stuck for over a month: I honestly don’t know whose problem it was, and I honestly don’t care – I’m not investing in funds where either of them are involved.

I actually got in only in Mid-November, with a substantially larger amount of money than I had initially planned, into Prudential ICICI’s Gilt Fund (Investment Plan). The fund has done real well and is fully invested in G-Secs. I show two points – one when I should have entered (showing off) and one when I did.

The fund has returned 10% in a month, and nearly 20% since October. (I have only got about 7% due to my staggered entry, but who’s complaining) I invested in the dividend payout option, where they paid out 5% of the existing NAV in November. The NAV fell 5% then – and since has recovered to go about 2% above the buy price. And, the dividend is tax free. Double the happiness.

I’m holding, for the next year or so. Using complex mathematics that can blow a hole in your wall, I have found that a further 1% drop in yield can lead to another 7% gain in prices. All we need is dropping inflation and more problems with growth; not entirely off the cards, one thinks.

There is risk in gilt funds. Being highly liquid they are marked to market every day, and if there is a flight away from quality the yields may go up. Unless inflation rears its head again, I doubt we will see yields increase (which will depress bond prices). Still, one must remember that these aren’t “floaters” – there is a chance you will lose money in a gilt fund.

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