Templeton India Income Opportunities: Invest

The volatility in interest rates in recent months has left bond investors in a tizzy. The yield on the 10-year G-sec is close to the previous highs at 9 per cent.

So, what should you, as an investor in bond funds, do?

Try bond funds that follow an accrual strategy.

Such funds try to capitalise on interest receipts rather than gains from bond prices. They may buy lower-rated bonds that offer higher rates.

Templeton India Income Opportunities Fund (TIIOF) is one such fund that invests in bonds offering higher yields.

The fund has outperformed its benchmark index consistently on one-, three- and four-year period timeframes.

Investors with 18-24-month investment horizon can consider investing in the fund.

The fund has delivered compounded annual growth of 8.7 per cent in the last four years since its inception against, 7.5 per cent delivered by its benchmark CRISIL Short-term Bond index.

When adopting an accrual strategy, the fund manager typically looks for shorter duration corporate bonds that deliver high yields. Templeton India Opportunities Fund focuses on high accrual securities, to take advantage of higher rates. The focus is to get returns through high accrual of interest on the bonds in the fund’s portfolio.

As on November 29, 2013, the fund size is Rs 3,808 crore. Thus, the fund manager undertakes an extensive credit risk analysis to identify corporate bonds that offer attractive yields and, at the same time, have lower default risk, that is, timely payment of interest and repayment of principal. Templeton India Opportunities Fund invests mainly in corporate debt, constituting 84 per cent of the portfolio, followed by 11.7 per cent in money market instruments.

The fund also invests in pass through certificates (PTCs), which are securitised debt, that is, high-quality debt instruments that represent ownership in a pool of assets. The ratings on the bonds range from AAA to A.

Tight liquidity conditions, which pushed up the short term rates in July and August, gave an opportunity for funds such as TIIOF to invest in money market instruments – commercial paper and certificates of deposit — offering attractive rates. In July and August, the proportion of money market instruments in the fund’s portfolio increased to 23-24 per cent, from 13 per cent in June.

As a result, the yield-to-maturity of the fund went up to around 12.6 per cent in August. As the rates normalised, the fund brought down the proportion of money market instruments to 12 per cent as of November.

Currently, the YTM of the fund is 10.9 per cent.

The fund has consistently beaten its benchmark across all rate cycles since its inception in December 2009. It has also performed consistently in both up and down rate cycles – March 2010 to October 2011 (up) and April 2012 to May 2013 (down) – delivering close to 12.3 per cent returns during both periods. The fund has consistently beaten its benchmark and other short-term bond funds, across all rate cycles.

However, the benchmark may not be an ideal yardstick, as the fund is a play on credit opportunities in the corporate bond spectrum.

COMMENT NOW