In our country, as in many others, gilts or government securities is a huge market. The outstanding government securities in our market is close to Rs 3 lakh crore. This figure is almost 50 per cent of the total deposits in the banking system. Despite such a huge size of the market, awareness about gilts is very scant. The main reason for the lack of awareness is that only banks, insurance companies and provident funds are investors in gilts. The wholesale nature of the market makes it impossible for small investors - companies, individuals or other entities to access this market. Apart from size, what is more important about gilts?

Gilts have zero default risk because it is a written obligation to pay interest and principal amount on certain dates issued by the sovereign state. Government of India cannot default on its obligations. It will not because theGovernment alone has the power to print money. To lend money to any other borrower - be it a bank or a company is not as safe as gilts. When a borrower defaults, you have to force him to pay you through the courts or the liquidator. Chances are you may not get your money back at all!

As a result of the reforms process, internal and global competition, many business, whether in the private or public sector, are threatened. There has been an alarming deterioration in the credit-worthiness of many borrowers. The effect of this deterioration is seen in rising levels of bad loans of banks and financial institutions. In such a situation, why can't people have access to the gilt market where there is no risk of default?

This was the genesis of K-Gilt. Through K-Gilt, any investor, big or small, can access the gilt market on any day. Money can be withdrawn on any day. The natural question is ``how about returns?'' The surprising part of gilts is that the returns are also attractive. Government currently pays morethan 10 per cent for one year money. For 5 year money, it pays 11.25 per cent whereas for 15 year money, the rate is 12 per cent. If one is lending money to anybody else, the rate should be higher depending on the risk of default.

All of the above does not mean there is no other risk in Government securities. If you want to sell a government security, you may get a lower or a higher price than what you paid for it. This risk is known as interest rate risk or a price risk. If at any point in future, interest rates rise, the prices of government securities will fall. But if the interest rates fall, the prices will rise. Therefore, it requires great skill to manage a portfolio of gilts. It requires trained & experienced personnel, macro-economic & security specific research and an ability to read interest rate trends.

To deal with the interest rate risk, the K-Gilt scheme offers two plans- the savings plan and investment plan. The interest rate risk in the savings plan is lower because the portfolioconsists mainly of securities which will mature in one year. The return from the investment plan is higher because the portfolio is mainly invested in securities maturing after one year. Investors can choose a plan depending on their price risk preference or by the duration they wish to remain invested.

The best part of gilts market is that it is relatively far more liquid compared to any other debt security. The daily trading volume in Government securities is several hundred crores of rupees. This enables one to fairly value the portfolio thereby generating the opportunity for investors to enter or exit at a fair value. The gilt fund extends the benefit of the wholesale market to small investors because K-Gilt has no entry or exit load. Liquidity is one of the most important aspects of an open-ended fund.

Investors, irrespective of the size of their investments, should be able to exit whenever they want the money. In case of K-Gilt, this becomes possible also for another reason. The RBI has given K-Gilta liquidity line as a special support to promote this safe investment avenue.

With effect from May 7, 1999, K-Gilt has introduced a dividend option in each of its plans to derive the benefit of the dividend tax rate of 10 per cent announced in the budget. Investors can choose either the growth plan or the dividend plan. The government, as an acknowledgement of the merits of a dedicated gilt fund has allowed provident, pension and gratuity funds to invest in a gilt fund. These developments coupled with the strong performance of the fund will help K-Gilt grow faster. It has a special appeal to investors of all kinds, big or small, for short periods or long periods.

The author is CEO, Kotak Mahindra Mutual Fund