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Strategy for debt-oriented funds If you have been reading the business dailies even cursorily, you could not have missed the concerns of rising crude prices and looming scenario of rising interest rates. While there has been an uptick in interest rates in some markets like the US, others like India are clearly witnessing a bias in that direction. . Inflation, the most-watched indicator when it comes to interest rates, has once again reared its head. For quite some time now, inflation, which was a major concern in global markets, was not perceived to be a problem in the Indian context. This was due to the base year effect (i.e. a higher inflation level at this time last year), which did not adequately highlight the rising inflationary trend. During September 2005, inflation increased by over 0.5% to 3.5% (year-on-year). As the year progresses, the base effect will likely wear off and the rise in inflation will get accentuated. Similarly, as crude prices hover at higher levels, it is likely that prices of domestic petroleum products will get hiked fuelling inflationary concerns. Other factors that could usher in a rising interest rate scenario in India are:
We have already seen concerns of rising interest rates reflect in rising bond yields. In September, the 10-Yr Government of India benchmark yield inched up from about 7.0% to 7.1%. If it weren’t for higher liquidity, the yield would have been even higher. Given such an ‘interest rate sensitive’ scenario, NRIs need to be cautious with respect to investing in longer dated debt investments. We believe NRIs should restrict themselves to short-term debt funds and floating rate funds. As the name suggests, short-term debt funds restrict their investments to shorter dated paper (less than 12 months), an ideal investment tenure in the present investment scenario. Floating rate funds invest in floating rate paper (as opposed to fixed rate paper), the coupon on which gets reset at regular periods. This to a large extent offsets the risk of rising interest rates, something that their fixed rate paper counterparts cannot boast of. For NRIs with an appetite for a little risk, we suggest investing in monthly income plans (MIPs). MIPs invest a portion of their assets in equities (ranging from 10%-25% of assets) and the balance in debt securities. The equity component of the MIPs acts as a kicker that helps it perform better than a conventional long-term debt fund over 18-24 months. We have profiled three of the better-managed MIPs below. The stringent criteria on which these MIPs have been selected are similar to the ones that we have employed while short-listing the equity-oriented funds in ‘Personalfn’s recommendations: Equity-oriented funds’. The only exception we have made is that we have only selected MIPs with a minimum 2-Yr history. We had to make the deviation from the minimum 3-Yr history criterion in the case of equity funds because the MIP category in India is still relatively nascent. 1) FT India Monthly Income Plan Fund Profile Portfolio Strategy Why you should invest in the fund
(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.) 2) DSP ML Savings Plus Fund - Moderate Fund Profile Portfolio Strategy Why you should invest in the fund 3) Templeton Monthly Income Plan Fund Profile Portfolio Strategy Why you should invest in the fund As we have mentioned at the outset, we have only considered MIPs with a minimum 2-Yr track record. From that perspective, we were compelled to leave out some well-managed MIPs that did not have that long a history. HDFC MIP (Short Term Plan) is one such fund. Over its short tenure (launched in December 2003), the fund has put in an impressive performance. This was particularly evident during the crash in May 2004 when it was among the few MIPs that did not skip a dividend.
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