Dec 30, 2008 06:00 PM
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A steady stream of lower-than-expected inflation numbers and fallingcommodity prices suggest that interest rates are likely to continuetheir descent from current levels. With the economy in slowdown mode, interest rate cuts may also be used to stimulate demand.
Investorsseeking to take advantage of the appreciation in bond prices likelyfrom the rate cuts should consider income funds for their portfolio.While the appreciation in gilt prices over the past few months may makegilt funds vulnerable to some price risk, bond funds may continue tobenefit from the wide corporate bond spreads.
Investors looking for a one-two year investment can consider exposure into Birla Sun Life Income Plus, a long bond fund.
Thefund invests in a mix of gilts and triple-A rated corporate bonds witha long maturity, offering both yields and trading opportunity. BirlaIncome Plus has consistently outpaced the benchmark over a three andfive-year period.
Performance: The fund’s NAV appreciated by 8.7 per cent in the one-year period to November.
Withthe bond rally picking up over the past month, the fund’s one-yearreturn has jumped to 23 per cent, outpacing the category average of 12per cent, by nearly 11 percentage points. This sudden jump in returnhas lifted the three-year return(annualised) to 13 per cent andfive-year return to 8.4 per cent.
Profile: The fund has been among the early ones to position its portfolio for falling interest rates.
Witha change in manager in November 2007, the fund rejigged the portfolioto increase average maturity at the start of this calendar year.However, the subsequent spike in interest rates prompted the manager toreduce the maturity once again. Greater certainty about interest ratedeclines in recent months has allowed the fund to substantiallylengthen its maturity profile to 11.55 years by November.
In thelatest portfolio, government securities accounted for 67.8 per cent(maturity period 10-years plus accounted for 40 per cent) and otherdebt papers 26.5 per cent. Corporate debt paper was of high quality, with issuers such as Rural Electrification Corp, Power Finance and IRFCbeing the top exposures.
Fund facts: The fund was launched inOctober 1995. It has been managed by Mr Maneesh Dangi in the past year.The fund charges no entry load. There will be an exit load, however, of0.75 per cent if investments are redeemed or switched out within 180days.
