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Fresh investments can be considered in units of income fund Birla Sun Life Dynamic Bond (BSL Dynamic). Over a three- and five-year perspective, BSL Dynamic topped the income fund category.
The fund returned an annualised 9.5 per cent over a five-year period. That's a good 2.4 percentage points higher than its benchmark. The category average return was an annualised 7.4 per cent during this period.
BSL Dynamic has flexibility to increase or decrease its portfolio maturity based on the interest rate outlook. This essentially shifts the responsibility of managing a debt portfolio actively from the investor to the fund manager.
SUITABILITY
Their dynamic nature, nevertheless, makes funds of this category slightly risky. Investors may be better off opting for dividend payout options to mitigate risk of any wrong interest rate calls by the fund manager.
The dividend option is particularly beneficial to investors in high tax brackets as dividends are not taxed at the investor's end. Also, unlike equity funds, the impact of compounding (if you choose the growth option) is also lower in debt funds, given the relatively lower returns.
FUND STRATEGY
With rising inflation and declining GDP growth rate, the direction of interest rates remains unclear. This calls for investments in actively-managed funds which can keep track of interest rate movements and shuffle portfolio likewise. BSL Dynamic Fund fits the bill, given its consistent record of providing better-than-benchmark return. Over the last five years, the fund outperformed its benchmark 100 per cent of the time on a one-year rolling return basis. Over this period, the fund did not generate negative returns on a rolling one-year basis.
While active management increases volatility (risk) of the portfolio, the fund's risk-adjusted return (measured by the sharpe ratio) at 1.25 indicates that active management has worked in the fund's favour. We have assumed a constant risk-free rate of 7 per cent throughout the period. This assumed risk-free rate is higher than the average return of one-year treasury bills.
PORTFOLIO AND PERFORMANCE
The fund has returned 10.6 per cent in a year, thanks to falling yields across instruments with various maturity periods. Higher accruals (interest payout from the instruments) also propped returns.
The duration of the portfolio as of April 2012 was 1.6 years compared with 2.7 years in August 2011. The yield to maturity of the portfolio as of April 30, 2012, was 10 per cent.
The fund managed Rs 5,348 crore of assets as of March 2012. Its large size, besides high cash holding, allows it to latch on to good debt opportunities when they arise and also diversify the portfolio.
The cash holdings also provide for investor redemptions without affecting fund performance. The cash holdings as of May 2012 accounted for 13.6 per cent of the portfolio.
In spite of high cash holdings, the fund holds instruments of 43 different issuers in its portfolio. This somewhat diversifies the fund from company-specific risks. The holdings are predominantly in high quality instruments such as gilts, AAA rated bonds, AA+ rate bonds and top rated short-term debt.
Top-rated instruments have better liquidity than the ones with lower rating. This will allow the fund to churn the portfolio without too much price risks.
The fund is managed by Mr Maneesh Dangi.
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