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Missteps on debt hurt

Vidya Bala
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Investors can avoid fresh investments in UTI Mahila Unit Scheme. The fund failed to take exposure to short-term debt instruments, which rallied well when interest rates rose. This dragged performance in the last couple of years. Higher proportion of equity compared with its benchmark did not also aid performance, given the choppy equity market conditions that prevailed in 2011.

UTI Mahila’s three-year return at 7 per cent annually, although higher than benchmark Crisil Hybrid Debt (75:25) index, is still lower than the average 8 per cent managed by debt-oriented funds.

That said, the 2-3 year tenure instruments held by UTI Mahila Unit Scheme provide scope for price appreciation when interest rates decline sharply. With interest rates showing signs of moving down over the next couple of quarters, investors can adopt a wait and watch approach on the fund.

Suitability

UTI Mahila is suitable only for investors with a long-term perspective of, say, 10 years. Simply put, it can be part of the debt component of your long-term wealth building portfolio. The fund returned 13.4 per cent and 13.9 per cent annually over seven- and ten-year periods, respectively.

Higher exposure to equity is one reason why the fund outperforms other debt-oriented funds over the long term. But if you have a three to five-year horizon, then this fund’s volatility may well shake you. Short-term debt-oriented funds may be a better option in such a case.

Strategy

UTI Mahila Scheme has the leeway to invest across short and long-term instruments. But over the last three years, the fund seldom invested in instruments with maturity of less than two years. This is apparent in recent years when the average portfolio maturity ranged 1.9-3.5 years. Its current average portfolio maturity stands at 3.4 years. So why has this led to under-performance?

The rising interest rate scenario for over two years now means that instruments with longer maturities face both interest rate risk and credit risk. As interest rates rally, the bond prices decline.

On the other hand, holding short term instruments may eliminate price risk. As these can be held to maturity, a fund can also benefit from the high interest rate by way of accruals (interest income).

By not actively participating in short-term certificate of deposits or money market instruments UTI Mahila has been a more passive manager of its debt portfolio.

But what is the way forward? Currently, triple-A rated corporate bonds with tenure of 2-3 years have yields of 8.1-9.5 per cent. That is in excess of similar period government bonds by 147-158 basis points. This provides scope for price appreciation in corporate bonds when interest rates fall and the gap (between corporate and sovereign instrument rates) narrows.

It is quite possible that the falling interest rate environment may trigger a bounce back in corporate performance as well. In such a case, UTI Mahila will benefit from both debt and equities.

The fund witnessed a similar scenario in 2009-10 when it benefited from a falling interest rate (when bond prices rose) as well as a rallying equity market and managed double digit one-year returns from early 2009 to late 2010.

Performance

With 30 per cent exposure to equities, UTI Mahila delivered just 1.5 per cent return over the last one year as against 5.1 per cent gain in its benchmark. Underperformance by large-cap stocks since late 2011 pushed the fund’s one-year rolling return to negative zone from September 2011 till January 2012. But the fund’s debt portfolio performance has picked up since.

Year-to-date returns at 7.1 per cent are higher than the benchmark return of 6.9 per cent. In June, the fund held 56 per cent of its assets in long-term corporate bonds issued by companies such as Shriram Transport Finance, Cairn India, IL&FS and PFC.

The fund is managed by Amandeep S. Chopra. NAV under the growth scheme is Rs 21.5.


The fund can be part of the debt component of your long-term wealth building portfolio.


(This article was published in the Business Line print edition dated July 22, 2012)
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