The Hindu Business Line : HDFC High Interest Fund: Invest

UNIT-holders in HDFC High Interest Fund (formerly Zurich High Interest Fund) earned a three-year annualised return of 13.5 per cent. The fund is suitable for risk-seeking investors who prefer to hold just one bond fund in their portfolio.

Portfolio: The past performance of the fund may not be a true indicator of the likely future performance. The reason is that the fund has somewhat changed its asset allocation strategy after HDFC Mutual fund acquired Zurich India Mutual Fund.

Earlier, the High Interest Fund had high exposure in corporate bonds and moderate exposure in government bonds. This reduced the overall portfolio maturity to typically less than five years. At present, however, the fund is not overweight on corporate bonds or government bonds.

If the month-end portfolio since this June is any indication, it appears that the fund is following a tactical asset allocation strategy.

The fund had, for instance, 56 per cent exposure in corporate bonds in June 2003, but has since cut the exposure to 37 per cent in September. Consequently, its exposure to government bonds has increased, leading to increase in portfolio maturity to 6-8 years.

The change in asset allocation strategy affects the portfolio's interest rate risk. Typically, longer the maturity, higher the risk of the bond prices declining in value in the event of increase in interest rates. The positive aspect is that the fund will also earn high returns should interest rates decline further.

The current portfolio is, therefore, more aggressive in the context of risk-return trade-off. That is why the fund is more suitable for the risk-seeking investor.

A cause for concern is the high volatility in monthly returns. The highest return since October last was 1.95 per cent in December 2002, while the lowest return was a 1.35 per cent loss in January.

Thus, the risk-adjusted returns have been low even though the fund has generated positive returns in 10 out of the last 12 months. That is true of most bond funds.

Finally, since the fund invests in corporate and government bonds of various maturities, the fund provides some exposure to all maturity sectors for investors who prefer to have just one bond fund in their investment portfolio. This fund is, hence, similar to Sundaram Bond Saver, except that the latter has lower interest rate risk because its portfolio maturity typically tends to be lower.

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