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Saturday, Jan 26, 2002

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`Income funds safe bet in short term for corporates'

Nilanjan Dey

KOLKATA, Jan. 25

IF you were an investor in income funds for the past two years, your average monthly returns would have been 1.09 per cent, a payoff that falls short of the average I-Sec index returns of 1.48 per cent.

A comparative review of debt funds (income, liquid and long-term gilt) done by Cholamandalam Distribution Services has brought to light this detail. It has also identified a number of winners and losers, from a set of 15 leading income funds, in terms of returns.

Income funds are typically compared with one another on the basis of their one-year performance, it has been contended.

However, corporate investors, which often plan out the need of funds well in advance, may want to know about their performance over shorter time periods, which could be as short as one month.

Mr D Babu, researcher with Chola Distribution, attributed such corporate inclination to the necessity of parking cash in debt funds purely on a temporary basis.

``A company would need to deploy money into its business as and when the need arises. At the same time, it would like to know if the money is safe in the short term,'' he pointed out.

The objective of the review was to work out the funds' month-on-month returns and to contemplate whether `safe' investments can be made in them over short time frames.

During the period, the names that stood out were PNB Debt Fund and Escorts Income Fund. The first clocked the highest average return of 1.43 per cent, while the second recorded positive returns in all 24 months. The highest average performance was experienced in November 2001 — 2.71 per cent.

Chola Triple Ace, JM Income, K-Bond Deposit (from Kotak Mahindra MF), Reliance Income and Templeton India Income had negative returns in only three of these 24 months. SBI Magnum Income (as also PNB Debt) posted negative returns in five months.

According to the review, complete month-on-month returns data series was available for six long-term gilt funds and ten liquid funds. The average monthly return in the first case was 1.5 per cent (beating the I-Sec index return of 1.48 per cent), while in the second case it was 0.72 per cent.

These figures have prompted Mr Babu to suggest that investors can safely commit even short-term surpluses to income funds. The latter can be rewarding for periods as short as two months.

``Even in volatile gilt funds, an investment over a four-month period can be beneficial,'' he maintained.

Chola has also observed that it is rare for liquid funds (which, theoretically, can provide negative returns) to lose money as most of them have a very limited maturity profile. As on December 31, the average maturity stood at 55 days.

``Some funds take a conservative approach by keeping their average maturity profile lower. In the reducing interest rate environment, funds with higher-than-average maturities score big. But they are also volatile,'' it has concluded.

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