A steady stream of lower-than-expected inflation numbers and falling commodity prices suggest that interest rates are likely to continue their descent from current levels. With the economy in slowdown mode, interest rate cuts may also be used to stimulate demand.
Investors seeking to take advantage of the appreciation in bond prices likely from the rate cuts should consider income funds for their portfolio. While the appreciation in gilt prices over the past few months may make gilt funds vulnerable to some price risk, bond funds may continue to benefit 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.
The fund invests in a mix of gilts and triple-A rated corporate bonds with a long maturity, offering both yields and trading opportunity. Birla Income Plus has consistently outpaced the benchmark over a three and five-year period.
Performance: The fund’s NAV appreciated by 8.7 per cent in the one-year period to November.
With the bond rally picking up over the past month, the fund’s one-year return has jumped to 23 per cent, outpacing the category average of 12 per cent, by nearly 11 percentage points. This sudden jump in return has lifted the three-year return (annualised) to 13 per cent and five-year return to 8.4 per cent.
Profile: The fund has been among the early ones to position its portfolio for falling interest rates.
With a change in manager in November 2007, the fund rejigged the portfolio to increase average maturity at the start of this calendar year. However, the subsequent spike in interest rates prompted the manager to reduce the maturity once again. Greater certainty about interest rate declines in recent months has allowed the fund to substantially lengthen its maturity profile to 11.55 years by November.
In the latest portfolio, government securities accounted for 67.8 per cent (maturity period 10-years plus accounted for 40 per cent) and other debt papers 26.5 per cent. Corporate debt paper was of high quality, with issuers such as Rural Electrification Corp, Power Finance and IRFC being the top exposures.
Fund facts: The fund was launched in October 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, of 0.75 per cent if investments are redeemed or switched out within 180 days.
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