GEM GAZE
December 2010

The goal of any investor is to accumulate wealth to fulfill future wants and needs. For a conservative investor, protection of principal is of utmost importance. However, financial prudence lies in having liquidity for contingencies, as well as a means for capital appreciation. If you seek capital appreciation and tax comfort, along with reasonable safety of capital, then debt funds should find a place in your portfolio.

December 2010 GEMGAZE helps you zero in on the debt funds that you can include in your portfolio. All the five GEMs of December 2009 have retained their venerable status in December 2010.

Kotak Bond Regular Fund Gem
Optimum option…

Incorporated in November 1999, Kotak Bond Fund has an AUM of Rs. 87.83 crore. The average maturity of the fund is low at 2.42 years and the credit quality is high. The portfolio is diversified with 15 holdings and the top 5 holdings constitute 67.43% of the total portfolio. Bonds constitute 51% of the portfolio, Government of India securities 18% and Certificates of Deposit 15%. The fund has returned 4.47% in the past one year as against the category average of 4.33%. The returns since launch have been an impressive 9.37% and the expense ratio is 2.07%. Though the recent performance is not as dazzling as the previous year, the fund has bettered the category average and maintained an optimal portfolio against the backdrop of the current market conditions.

ICICI Prudential Gilt Investment Fund Gem

Long-term laurels…

Incorporated in August 1999, ICICI Prudential Gilt Investment Fund, a pure debt fund that invests only in government securities, has an AUM of Rs. 225.45 crore. The average maturity of the fund is high at 9.75 years, the Yield To Maturity (YTM) is 8.08%, and the credit quality is high. To cater to a long term horizon, the fund invests in securities of longer tenure. This helps in earning the higher yield associated with longer term investments. However, this also comes with a higher level of interest rate risk, in the short to medium term. This is because the portfolio's value is marked to market, and therefore responds to changes in market interest rates. The objective is to closely manage the downside risks of the portfolio arising out of changes in the market rates, by actively managing the duration of the portfolio. The portfolio is concentrated with 8 holdings and the top 5 holdings constitute 100% of the total portfolio, all Government of India securities. The fund has returned 4.07% in the past one year as against the category average of 3.55%. In recent times, the RBI has undertaken a series of rate cuts to infuse liquidity into the system. The falling interest rates have translated into an appreciation in prices of long-term bonds and government securities alike. Expectedly, this fund has benefited. The returns since launch have been a laudable 10.98%. The expense ratio is 1.25%.

Fortis (BNP Paribas) Flexi Debt Fund Gem
Aggressive activity…

Incorporated in September 2004, BNP Paribas Flexi Debt Fund has an AUM of Rs. 250.31 crore. The average maturity of the fund is medium at 6.33 years, YTM is at 6.15%, and the credit quality is high. BNP Paribas Flexi Debt is an actively managed debt scheme where the fund manager’s view is reflected clearly through the maturity profile of the securities and the subsequent duration of the scheme. The fund takes advantage of arbitrage between corporate and government bonds and between short and medium term corporate and treasury bonds. But the fund accords top priority to safety of the principal and selection of bonds that are liquid enough to buy and sell. The main objective of this fund is to generate income through a range of debt and money market instruments of various maturities to maximise income, while maintaining an optimum balance between yield, safety, and liquidity. The portfolio sports 10 holdings and the top 5 holdings constitute 93.82% of the total portfolio. Debentures constitute 49% of the portfolio, Government of India securities 32%, and Structured Obligations 15%. The fund has returned a mere 3.77% in the past one year as against the category average of 4.33%. The returns since launch have been 8.05%. The expense ratio is 2.08%. In view of its notable performance over the years, the fund still enjoys a GEM status.

Canara Robeco Income Fund Gem
Costly churning …

Incorporated in September 2002, this ICRA 5 Star Gold Award winning fund has an AUM of Rs. 227.62 crore. The average maturity of the fund is 8.23 years, the average YTM is 8.44%, and the credit quality is high. The fund maintains a well-diversified portfolio of 19 holdings with a mix of long- and short-term instruments. The top 5 holdings constitute 62.80% of the total portfolio. Debentures constitute 28% of the portfolio, Government of India securities 27%, and Commercial Paper 25%. The fund has returned 4.24% in the past one year as against the category average of 4.33%. The returns since launch have been 8.87%. The expense ratio is 2.12%. The fund manager actively manages the maturity of the portfolio. This nimble-footed strategy has amply rewarded the fund. But the churning has come at a cost and it is among the most expensive funds in the category.

Birla Sun Life Dynamic Bond Fund Gem
Deft delivery…

Incorporated in September 2004, Birla Sunlife Dynamic Bond Fund has a high AUM of Rs. 7095 crore. The fund seeks to optimise returns by designing a portfolio to dynamically track interest rate movements in the short-term by reducing the duration in a rising rate environment, while increasing it in a falling rate environment. To maximise returns and gain maximum value out of securities, the fund looks at curve spreads on both the gilt and bond markets. For investors who cannot actively manage their debt portfolios, Birla Sun Life Dynamic Bond Fund is an ideal option. The average maturity of the fund is low at 3 years, the average YTM is 8.13%, and the credit quality is high. The portfolio is diversified with 33 holdings and the top 5 holdings constitute 60% of the total portfolio. Bonds constitute 31% of the portfolio, Government of India securities 24%, and Structured Obligation 18%. A close scrutiny of the fund’s portfolio over the past year shows that it has juggled tenors and assets quite nimbly in what was a challenging year for debt managers. The fund has been deftly managed, delivering impressive returns over a year, and figuring within the top quartile of debt funds over the three- and five-year time-frames. The fund has comfortably beaten its category average over all of these terms. The fund has returned a commendable 5.14% in the past one year as against the category average of 4.33%. The returns since launch have been 7.81%. The expense ratio is very low at 0.98%.