Long-term debt strikes back

The long-term debt category is back in vogue after lying on the sidelines for the past three years. The interest rate cycle seems to be peaking out and though inflation is still a concern with RBI, presently it is under control.

In this environment of softening yields, gilts and income funds have put up a decent performance in the last 6 months.

Birla Sunlife Income Fund’s NAV has grown by 16.05% in the last one year, which is almost twice the returns generated by the benchmark - Crisil Composite Bond Fund index.

The objective of the scheme, formerly known as Alliance Income Fund, is to generate income and capital appreciation by investing 100% of the corpus in a diversified portfolio of debt and money market instruments.

The scheme has a mandate to invest in T-bills, government bonds, corporate debt papers, CPs, CDs and asset-backed securities.

The scheme has quickly realigned its portfolio, and has invested in the longer end of the yield curve in the last two months.

As a result, the weighted average maturity of the portfolio has increased to 14.92 years, from 3.35 years in October 07. In view of the adverse interest rate conditions in the last year, the fund manager had chosen to stay liquid, during most part of the year.

The cash holding has reached as high as 56.89% of the total net assets in August 07. The scheme had been investing in various NCDs and T-bills in the past, and there was no exposure to dated government securities.

However, since last two months, the scheme has taken a meaningful exposure in them. 8.33% GOI (2036) occupies a weight of 35.25% in this month’s portfolio, 8.5% GOI (2023) has a weight of 12.82% and 8.23% GOI (2027) occupies 5.1% weight. Inspite of the reallocation, the fund house still has almost 20% of the portfolio in cash.

The renewed investor’s interest in the income fund category can be gauged by the inflows witnessed in them in the last quarter.

The scheme currently has a corpus of Rs 194.96 crore, against Rs 31.94 crore of AUM in June 07. In terms of credit ratings, the scheme has invested chiefly in sovereign rated papers, and other papers enjoying high credit ratings, therefore the portfolio carries very little credit risk.

In January, the yield on benchmark 10-year g-sec papers dropped to 7.29%, on the back of cues from US Fed rate cuts. However, market participants of RBI following the rate cut cues was not to be, as the apex bank maintained status quo on key rates, fearing inflationary pressures.

However, the widening interest rate differential with global markets can mean that there will be further hardening of rate in domestic market.

In this scenario, long-term debt products have turned attractive once again, compared to funds which invest in short term papers, because of the greater re-investment risk that the short term funds are exposed to.

Debt fund investors who have been shying away from such products may have to do a rethink in their strategy.

Birla Mutual Fund has seen an increase in its assets under management by Rs 4135.48 crore over January, 2007 and majority of this increase has come from the debt and liquid schemes. With the kind of increase mentioned above, the schemes look good for future investments.

Though the corpus size Birla Sunlife Income Fund may not seem as a very lucrative fund but looking at the kind of performance of the scheme over the last few months and also a decent track record since inception the scheme looks good for future investments.

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