Gem Gaze

Dashing Debt Dynamites!

Optimal debt fund management is about generating superior returns with minimal incremental risk. These debt dynamites have been dashing enough to take advantage of opportunity in the midst of volatility, while at the same time, lending stability to your portfolio.

Principal Income Fund

A disciplined approach to credit and interest rate risk makes this the most effective fund in this category. The superior performance in the past seven years is a result of dynamic asset allocation and relative valuation trades. Being quality-conscious, the fund confines itself to AAA-rated corporate bonds and gilts. Its dynamic asset allocation strategy has seen government securities move from 55.6 per cent of the portfolio, when yields were near an all-time low, to 13.3 per cent when bond prices corrected. Within its government securities portfolio too, the fund has been tactful to move between value and momentum stocks depending on the state of the market. The fund has exhibited its vitality by adjusting its average maturity to changes in the market and tiding over sudden swings in assets, unscathed. Slighty high expense ratio is the price the fund has had to pay for this dynamism but superior returns more than make up for this.

Birla Sunlife Income Fund

Birla Sunlife Income fund, formerly known as Alliance Income Fund, has been in existence since March, 1997. Safety and quality are on top of the agenda with a major portion of the portfolio invested in treasury bills (45.79%), AAA-rated corporate bonds (22.94%) and securitized instruments (10.5%). Over the past decade, the fund has put up a sterling performance with a CAGR of almost 10% since inception.

Kotak Bond Regular

Kotak Bond Regular has generated consistent returns since its inception in November 1999, yielding 9.72 per cent per year with a very low expense ratio of 0.89 per cent. The portfolio consists predominantly of quality rated corporate papers (30.52 per cent in non convertible debentures and 9.83 per cent in commercial papers). The fund has parked 31.63 per cent of its net assets in dated gilts, with an average maturity of 8.38 years. On the other side of the spectrum, instruments such as securitised debt are used to increase the average yield of the portfolio. Risk management is accorded top priority and the emphasis on a high yield portfolio has helped keep the fund’s volatility under control.

LIC Bond Fund

LIC Bond Fund has been one of the most consistent performers, thanks to its high exposure of 87.4% to corporate bonds. Importantly, within the fund’s huge corporate bond portfolio, there is a 24.3 per cent holding in AA- and AA+ bonds, higher than its peers. Inspite of its high holding of low-rated paper relative to its peers, its corporate bond portfolio tilted in favour of AAA-rated papers, has helped it achieve stable returns over the past five years. The cut in its average maturity profile from about six years at the end of 2003 to just 1.3 years and the reduction in the exposure to g-secs was done to hedge against rising yields.

UTI Bond Fund

UTI bond Fund, with relatively low volatility and stable returns, is ideal if you have a medium term investing horizon. This is due to conservative positioning with a relatively lower average maturity of its portfolio, a higher weightage of corporate bonds and a portfolio of g-secs, which are of medium-term duration. 61.7 per cent of its holding is in AAA rated bonds, which give strong accruals, and only 10.7 per cent is in g-secs. The fund has seen a slow but sure growth in NAV. UTI Bond has the largest asset base of Rs 388.98 crore among its peers and a low expense ratio of 1.4. During periods of increased volatility, this helps boost the fund's returns.

Debt funds were on a roll till early 2003, when interest rates bottomed out with a steep slide from 14 % to 7 %. This turned the table in favour of administered return schemes such as POMIS, NSC and RBI bonds and saw a drastic reduction in the size of debt funds. Now with the slowing down of the US economy, falling inflation and softening interest rates, the debt dynamites are back with a bang! Get ready for the balancing act…interesting times indeed.