CanRobeco Indigo Fund: HOLD

With gold exchange traded funds (ETFs) outperforming most other asset classes in recent years, fund houses have launched several products that combine gold with equity and debt investments.

But funds that have both gold and equity in their portfolio may yield low returns because the two assets often tend to move in opposite directions. CanRobeco Indigo Fund has taken a different route in allocating its portfolio only to debt and gold.

With returns from both asset classes turning very attractive in the past two years, the fund has delivered good returns. Its returns over a two-year time frame were at 12 per cent per annum while they stood at 16 per cent for one year.

Risk profile

While investors may opt for a fund invested in debt and gold primarily for safety, gold is not, in the real sense of the word, a ‘safe’ investment.

This is because while the bulk of returns for debt instruments come from accruals (interest receipts), those for gold come only from capital gains.

Where an asset offers the prospect of capital gains, it must suffer from the risk of capital losses too. Therefore, investors in the Indigo Fund must brace for a higher risk profile than they would face with a plain vanilla debt fund.

Why hold

Having said this, three factors argue for holding on to the CanRobeco Indigo Fund. One, the fund has the flexibility to allocate anywhere between 10 and 35 per cent of its portfolio to gold. But in the past year or so, it has consistently maintained a higher allocation to gold ETFs.

The exposure has hovered between 29 and 33 per cent in recent months. So far, the high allocation to gold ETFs has helped returns.

This could change if gold ETF returns fall, either on account of retreating global gold prices or a more stable rupee.

In this event, the fund can reduce its gold ETF holdings to its lower bound of 10 per cent, if it perceives a risk to gold prices. In this case, it will deliver closer to debt returns.

Two, the debt portion of the portfolio has been savvily managed. In the past year, the fund has retained a maturity profile of just above one year.

Investments have been mainly in commercial paper (rated p1+), certificates of deposit, corporate bonds and CLBO. Exposure is mainly to money market instruments or corporate debt rated AAA or equivalent. This minimises both interest rate and credit risk.

Tight market liquidity and rising interest rates have, on the other hand, made for attractive returns from short-term instruments. In recent months, the fund’s yield to maturity has ranged from 9 to 10 per cent.

Three, CanRobeco has a good track record in managing debt funds. As the gold component requires only passive management mainly through ETFs, it appears to be a good investment option.

The NAV of the growth option is Rs 12.5 per unit.

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