A fund manager with a private mutual fund said that uncertainty aboutinterest rate movements in the near term had led to some reservations onbuying longer tenor instruments of above 7-year maturities. "Basically, fundmanagers have trimmed their assets at the longer end leading to a minorcorrection of 10-15 paise," he added.

According to Sandesh Kirkire, fund manager for debts in Kotak Mutual Fund,the narrowing spreads between the yields on AAA-rated corporate paper andgilts to around 70 basis points has made investments in gilts moreattractive because of the absence of credit risk and better liquidity.

The share of gilts in the income scheme, K-Bond, for instance at the end ofApril 2000 was 45 per cent of its total corpus of around Rs 200 crore. Thecorpus of K-Gilt, the gilt fund, is around Rs 700 crore.

Kirkire believes that the apathy of market players for long term gilts isinduced by oversupply of instruments of tenor above 7 years. The netbudgeted borrowing target of the government is more or less at the samelevel of last year and annual inflows into the system will be nearly Rs60,000 crore till 2008 in the form of coupon payments and redemptions.

Most gilt fund managers say they would be happy with an average yield of10.5 per cent to 11 per cent going forward to the next quarter ended June30, 2000. Compared to this, the returns for the quarter to March this yearwere much better in the investment plans (which have longer term investorsand hence a long term portfolio maturity).

K-Gilt had an average portfolio maturity of 5.66 years under its investmentplan and the average 90-day rolling returns worked out to 13.82 per cent atthe end of April 30,2000.

The returns for Birla Gilt Plus under the long-term investment (over 3years) for the last 90-day period work out to 11.25 per cent while 90-dayreturns under the investment plan (for investments between 1 and 3 years)and liquid plan (investments upto 1 year) were 11 per cent and 11.4 per centrespectively, point out sources.

Sources in JM Mutual feel that once the higher 22 per cent tax on dividendcomes into force from June 1 this year, the dividend option would becomeless attractive for investors in the 20 per cent tax bracket althoughinvestors in the top tax bracket would still find it attractive to invest inthe dividend option for the tax advantage.