INCOME FUNDS are a safe bet

ToI 10/2/09


   Where should I park my money? That’s a question many are asking wealth advisors today. Looking at the current market condition it is important to invest across asset classes. 

   With the softening of interest rates financial advisors say over the next 6 to 12 months income funds are a good option to consider. “The income funds have generated a return ranging from 5% to 15% on a one-year basis. The returns have been divergent across the schemes depending on the interest rates view taken by the fund managers,” says Kumar Nathani, fund manager (fixed income), Taurus Mutual Fund.


How safe are debt funds

Debt funds are less volatile and the risks are lower. However, there are some risks like interest rate risk and credit risk. “While interest rate risk is a macro level trigger and cannot be controlled, credit risk can be controlled by prudent portfolio construction and active portfolio management,” says Rahul Goswami, co head fixed income), ICICI Prudential AMC.
managers’ say in the current scenario both and gilt funds are becoming popular on expectations that the interest rate would be heading lower. However, near time volatility cannot be ruled out, due to demand and supply factors. “Debt funds and gilt funds have outperformed other categories over the last 6 months based on the downward trend in interest rates,” says Goswami.

 

Gilt versus income/debt fund

Gilt is a type of income fund where the investments are done only in securities issued by the government. They are different from other income schemes as no exposure is taken on corporate bonds.
A debt fund invests in both short and long term debt securities of government and corporate sector. Government securities provide safety and liquidity to the portfolio while investment in corporate debt securities seeks to give higher accrual income through credit spread over gilts.

 

How an income fund works

The objective of the fund is to generate income through investments in a range of debt, corporate bonds and money market instruments of various maturities. It is achieved through a combination of accrued interest income and capital gains on price appreciation of underlying bond holdings.

 

Points to focus

When investing in income funds, focus on the credit quality of the portfolio. “The investor should have an investment horizon of at least one year. It is also important to see the interest rate cycle movements, which can help in providing better returns,” says Nathani.

 

How to analyse the quality of portfolio

Most of the funds invest in papers that are rated by various rating agencies. Hence the quality of papers where they invest are high. Review the fact sheet on the funds. The fact sheet is a monthly feature that provides an investor with a single point access to information specific to all funds. It is critical that investors invest in funds that have high portfolio disclosures and provides complete access to information on their portfolio quality, corpus amount and other such fund details.

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