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Suresh Krishnamurthy

UNITHOLDERS in Prudential ICICI Gilt Plan-Investment Plan can consider cutting their exposures to the fund. Yields on long-term government securities have declined sharply over the past several months. Although the policy bias continues to be towards soft interest rates, the probability of further decline in long-term interest rates appears remote.

Even if interest rates do fall, the possibility of yields of short-term government securities declining more than long-term securities is higher. In fact, the difference in yields of long-term government securities has already widened in the last three months. This will lead to under-performance of long-term government securities compared to shorter-term government securities. In this backdrop, unitholders can exit from long-term gilt schemes such as Prudential ICICI Gilt Plan-Investment Plan.

Portfolio allocation: The Prudential Gilt's Investment Plan is a mid-sized fund with funds under management of Rs 457.20 crore at the end of March 2003.

The cash position in the fund is about 4.5 per cent. The fund's average portfolio maturity is high, at 7.4 years. Investments have substantially been made in securities with term to maturity of more than five years.

The fund actively manages the average maturity of the scheme. At the end of June 2002, the average was about 10.6 years. This declined to about 6.05 years by end-October 2002. Since then, the fund manager seems to have favoured the extremely long-end of the government securities market. The average maturity rose to 14.28 years at the end of December 2002 and to 17.43 years at the end of March 2003. Active management of the average maturity holds the potential to deliver superior returns to the unitholders. However, the extending the average maturity in a relatively illiquid government securities market enhances the risk profile of the scheme.

In addition, if interest rates remain stable, the fund is likely to generate returns that may only be about 5 per cent given the yield of less than 6 per cent on long-term government securities and the fund's expense ratio of about 1.15 per cent.

Performance: The fund's performance since launch in August 1999 has been impressive. It has delivered annualised returns of about 17.6 per cent between August 1999 and March 2003. In terms of comparison with peers, the fund has lagged some of the prominent funds over the last 12 months. However, through active maturity management in the last three months, the fund is one of the leading performers among long-term gilt funds over the last three months.

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