The RBI may have disappointed the markets by opting to stay put on rates in its February policy review. But that does not change the fact that the Reserve Bank is clearly on an easing path.
Outside the policy review cycle, the RBI’s 25-basis point cut in policy rate in January clearly marked the beginning of a rate cut cycle.
An anticipated 50-75-basis point cut in repo rate over the next two to three quarters opens up a good opportunity for debt investors. It may be a good idea for investors to consider dynamic funds such as Franklin India Income Builder with a three-four-year perspective.
These funds have the flexibility to switch between short-term and long-term debt instruments, depending on the fund manager’s view on interest rates.
The fund has been in existence for 17 years and has delivered consistent returns. Over the last five years, it has beaten its benchmark more than 80 per cent of the time.
Though it lags top-notch funds in this category such as Birla Sun Life Dynamic Bond, it does manage to consistently outperform its benchmark, making it a sound bet.
Right calls
Franklin Income has been able to cash in on bond rallies and also cap losses due to its active management of the maturity profile of debt instruments.
At the lower end, the duration has gone to as low as 0.5-1.5 years, while at the upper end investments with maturity profiles of 7.5-10.5 years are made.
For instance, during March 2010 and October 2011, when policy rates were hiked by 375 basis points, the fund delivered 10.6 per cent return, beating its benchmark by almost 2 percentage points.
The average duration of the fund during this period was down to 1.5 years. Similarly, the fund was able to cash in on the downward rate cycle between April 2012 and May 2013, by increasing its duration to about 4.5 years.
But the fund has underperformed its benchmark and some of the top-performing funds over the last one year.
This is because it has been conservative and has not increased its duration significantly. On an average, the duration has been a little over 3.5 years.
The fund also takes an active call on credit risk in corporate bonds.
Over the last two to three years, it has invested about 60 per cent of its portfolio in corporate bonds and about a fifth in G-secs.
It has also invested about 40 per cent in AA rated securities. The fund’s yield to maturity is hence, higher at 10.1 per cent.
This article was originally published in The Hindu Business Line on on February 15, 2015
