HDFC Floating Rate Income – Long Term: Invest :: Business Line

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Investors with a one-year horizon can consider buying units of HDFC Floating Rate Fund - Long Term (HDFC Floating). We had recommended this fund with a one-year investment horizon last year. Those invested in the fund can consider staying invested for a year more.

The current liquidity crunch is likely to keep interest rates in short-term instruments attractive. As HDFC Floating invests in such instruments, it will continue to enjoy attractive investment opportunities.

HDFC Floating is an open-ended income fund that invests in short-term debt instruments (predominantly in money market instruments) to protect invested capital during times of volatile interest rates. The fund doesn't necessarily invest in floating rate instruments.

The fund is among the top performers in its category. It returned 10.5 per cent in the last one year. Its benchmark, CRISIL Liquid Fund index, returned 8.6 per cent over this period. The fund also managed better returns than most peers over three- and five-year periods.

STRATEGY

Even as the Reserve Bank of India cut policy rates by 50 basis points, the interest rates on certificate of deposits and commercial papers have not corrected steeply.

Tight liquidity and high likelihood of interest rates remaining stiff when private demand picks up strengthen the argument for elevated short-term rates.

Inflation is also expected to play a role in keeping the rates high.

The three month- and one year-certificate of deposit rates are currently at 9.7 per cent and 10 per cent, respectively.

The fund currently holds instruments with maturity of 11 months (being the average portfolio maturity). This gives clarity in terms of returns one would get by investing in HDFC Floating.

The fund is a better option than fixed deposits for investors in higher tax brackets, given that interest on deposits is taxed with regular income.

The average one-year rate offered by banks is 9.25 per cent.

Investors, please note that the fund has an exit load of 2 per cent up to one year of investment. An exit prior to this period will give sub-optimal return.

PERFORMANCE AND PORTFOLIO

The fund outperformed its benchmark 94 per cent of the times in the last four years on a rolling return basis. During this period, the fund's least annual return was 4.9 per cent while its best return was 10.6 per cent.

Post change in the exit load structure last year, the fund has adopted a buy and hold strategy. This reduces price risks arising from selling instruments before their maturity.

That it follows a buy and hold strategy is evident from the portfolio maturity over the months. For instance, in the months leading to March 2012, the portfolio maturity was gradually declining.

It stood at less than a month in March 2012. In April 2012, again, the fund's portfolio maturity rose to close to a year. This suggests that the fund was holding debt instruments close to their maturity.

This strategy helps the fund deliver better returns than its peers with relatively less risk. A high exit load also reduces redemption pressures.

As of April, the fund was almost fully invested in top-quality certificate of deposits with low risk profile.