Monday, December 08, 2008


Gem Gaze

Is the party (banquet for the prodigal son) over?

After four years of subdued existence, debt mutual funds made a sparkling come back in 2007. Diversification to debt is one of the better options available to investors in the current uncertain period in the markets, when equities wilted under the heat of the global financial market meltdown. The superior show by debt funds, led by a sharp rise in bond prices in the past few months, was on hopes that inflation would decline and trigger a spate of interest rate cuts. The bet has turned out to be right so far, but it is uncertain as to whether such a sterling performance can be repeated next year. This is because prices of these bonds are expected to slip on higher-than-estimated borrowing by the government. The government’s borrowing programme for 2008-09 may overshoot its target of 2.5% of gross domestic product (GDP), or Rs 1.33 trillion. Higher government borrowing results in increased supply of bonds, which negatively impacts prices and pushes up yields. In addition to fundamental reasons, smaller fund size (around Rs 150 – 200 crore) would be critical for debt schemes to maintain their performance of 2008.

The Dashing Debt Dynamites of last year have not lost hold of their grip on the Gem status, save one. Principal Income Fund failed to live up to our expectations and has been replaced by the gaiety gait of ICICI Prudential Gilt Fund, with its robust returns.

Birla Sunlife Income Fund Gem

Bounty at the Banquet

Launched in March, 1997, this decade-old fund with an asset base of Rs.194.96 crore (Rs.31.94 crore in June 2007) and an average maturity of 8.28 years, has several awards to its credit. The noteable awards during the past one year include the 2007 CNBC-TV18 CRISIL award, the 2008 Lipper Awards for the Best Fund (3 and 10 years performance) and the ICRA Five Star Award (1 and 3 years performance). Rs 1 lac invested on 8-Dec-2003 in Birla Sun Life Income Fund is worth Rs.135735 as on 5-Dec-2008. A similar investment in the benchmark CRISIL Composite Bond Fund Index would have been worth Rs.118655. The one-year returns are 13.15% as against the category average of 8.69%. With 61.93% invested in Government of India Securities and 25% in AAA rated bonds and 20 % in cash, safety ranks high on the fund’s agenda.

Kotak Bond Regular Fund Gem

Quality quadruples kitty

Kotak Bond Regular Plan, a medium-term, open-ended fund has generated consistent returns since its inception in November 1999, yielding 9.72 per cent per year. For a 1-year period, the fund has delivered returns of 8.58 per cent, which is better than the benchmark’s 5.75 per cent and the peer group’s 6.14 per cent. Kotak Bond Regular has not only generated decent income for its investors, but has done so with a reasonably low level of volatility. It has managed this by investing in quality rated corporate papers keeping 60-70 per cent of its portfolio in high yielding assets such as bonds, commercial paper, corporate deposits and securitised debt. The balance 30-40 per cent is deployed in riskier government securities. The emphasis on a high yield portfolio and spreading the risk across a wide maturity horizon and different kinds of issuers in debt markets has helped keep the fund’s volatility low. At the same time, no opportunity has been lost to book gains when the market has provided profit booking opportunities. Besides, savvy short-term calls in the g-sec market have helped the fund generate superior returns. The g-sec exposure doubles up as a means to address redemption pressures, thanks to relatively high liquidity in that market. On the other side of the spectrum, instruments such as securitised debt are used to increase the average yield of the portfolio. This is despite the fact that such instruments are illiquid. But then, securitised debt accounts for only about 14 per cent of the portfolio, and even in a case of redemption pressure there may be no need to liquidate this part of the portfolio. The expense ratio of 0.89 per cent is very impressive and is significantly lower than the category average. But now, the expense ratio stands at an all-time high of 2.25% in view of the active interest rate bets taken by the fund. The scheme currently managed assets worth Rs 37.46 crore. It has seen outflows in the last couple of quarters. This erosion in fund size is attributed to the overall trend in the debt market. In a nutshell, Kotak Bond Regular is a reliable fund which delivers high returns, with about average volatility. A reduction in expenses will make it a truly quality offering.

LIC Bond Fund Gem

Lean Lead

This medium-term, open-ended debt fund, launched in November, 1999 has an asset base of Rs. 58.42 crores. Its one-year return has been 11.25 % as against the category average of 8.69%. With 43.3% of its assets in Government of India securities, 49.52% in Debentures (20% in AAA rated papers) and 8.46% in Structured Obligation, safety seems to be the overriding concern.

UTI Bond Fund Gem
Upholding Ubiquity
Launched in May 04, 1998, the fund aims at providing regular savings facility, easy liquidity and attractive post-tax returns to the investors through capital appreciation. It has an asset base of Rs. 215.18 crore with 41.66 % in Government of India Securities, 27.4% in NCDs, 25.37% in Debentures and Bonds and 5.57% in current assets. Its 1 year return is 9.72% relative to 2.68% of the benchmark J.P.Morgan Indian Government Bond Composite Index.

ICICI Prudential Gilt Investment In

Gaining Ground

The 2008 Lipper Award winning ICICI Prudential Gilt Investment Plan has generated an annualised return of 12.2 per cent and has consistently outperformed the benchmark I Sec I-Bex by a comfortable margin since its inception in August 1999 and this period spans varying trends in the interest rate cycle. Even as equity markets were struggling to generate a positive return, ICICI Prudential Gilt has piggybacked on rising gilt prices to generate a return of 25.3 per cent over a one-year period as against the category average of 15.7 per cent. A major part of this return has been achieved during the past few months, amid the sharp slide in yields. Though returns of this order may not be repeated, returns are likely to remain healthy (in the 10-11 per cent range) over the next one year, given the softening bias to interest rates. According to the November portfolio, the fund had 91.6 per cent in long-term bonds (above 10-year maturity), 3 per cent in CDs and term deposits and the balance in money markets and other assets. The preference for long-dated securities, reflected in the 10-year yield-to-maturity, has dropped from a high of 9.5 per cent to 6.7 per cent. The softening of inflation and the anticipated cut in interest rates have pushed down yields and helped prices of long-term bonds over the past six months. The fund intends to hold 70 per cent of the assets in long term instruments and 25-30 per cent will be churned to generate higher yields. With the interest rate heading south, ICICI Pru Gilt Investment has a potential to generate better returns. A conservative investor might find the liquidity of the fund and the sovereign guarantee that backs its securities attractive. Those in the higher tax brackets may also find it a tax efficient way to earn debt returns.

The equity market has belied investors’ hope of a quick revival, what with the correction that started in January 2008, showing no clear signs of waning. However, given the interest rate movement over this period, those who had invested in debt funds would have derived some comfort. Whether this cushion will remain soft or hurt in 2009 remains to be seen…

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