• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

B. Venkatesh

PRUDENTIAL ICICI Income Plan recorded an annualised return of 14.5 per cent in the last three years. Retail investors who propose to invest in just one debt fund can buy units in this plan. The fund may not be suitable for those proposing to build a bond portfolio consisting of gilt and income funds that attempts to maximise returns by taking selected exposure across the yield curve.

Investors need to consider the following factors before buying units in the fund: The fund's allocation to government and corporate bonds is between 40-60 per cent and 30-45 per cent respectively.

The fund's large asset base suggests high proportion of corporate investors. This requires the fund to hold sizable proportion of the fund in liquid assets to meet large redemption requirement.

The fund, however, carries less than 10 per cent in money market instruments, which moderates the cash drag on the portfolio; cash drag refers to the lower returns that money market instruments earn compared with the corporate and government bonds.

The liquidity to meet large redemption requirement has to hence come from the government bond portfolio. This means that the fund has to invest in highly liquid government bonds, which also tend to be the most volatile in the market. This leads to high fluctuation in the monthly returns; for instance, the fund returned 1.8 per cent last December, but lost 1.3 per cent this January.

The fund's strategy to concentrate on high-grade corporate bonds means that scope for capital appreciation is not as high as in funds that have high exposure to below AAA-rated bonds. The positive side is that the fund will be subject to lower credit risk due to its exposure to high-grade bonds.

Another important factor is the maturity of the bonds in the fund's portfolio. The fund has sizable exposure in medium-term government bonds and short-term corporate bonds, with minimal exposure in long-term bonds. This exposure across the yield curve makes the fund suitable for those inclined to invest in just in one bond mutual fund.

It is precisely for this reason that the fund is not suitable for those proposing to construct a portfolio comprising of gilt and income funds.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Obstacles to good financial reporting

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line