Birla Income Plus: Invest

Recommendation: Invest

B. Venkatesh

BIRLA Income Plus (Growth) returned under 7 per cent since this January. Investors may consider buying into the fund for fair returns.

The fund may be suitable for retail investors who are willing to bear sharp fluctuations in net asset value (NAV). Such fluctuations may arise due to withdrawal/investing of large sums by corporate investors at a short notice. It must, however, be stated that the volatility in fund returns has not been very high in the past.

Portfolio: As of end-September, the fund had about 11.5 per cent in government bonds, 61 per cent in corporate bonds, nearly 7 per cent in quasi-government bonds and 10.4 per cent in call money. The fund's average portfolio maturity was 2.35 years.

Investors need to consider the following factors before buying into the fund: First, the effect of the average portfolio maturity of 2.35 years. This appears a decent trade-off between capital appreciation and higher income due to higher yields.

To explain, an average portfolio maturity of, say, one year suggests that most of fund's portfolio is redeemable in the short term. The fund will then be forced to reinvest these proceeds at a lower rate, should interest rates decline. It may lose out on capital appreciation as well. Why? When interest rates fall, the medium- and long-term bonds rise more than short-term bonds. Since NAVs are calculated on the market price of these bonds, a portfolio of medium- and long-term bonds contribute to higher NAVs.

But what if interest rates rise? The NAV of a fund invested in medium- and long-term bonds will fall as the existing bonds align to the new (higher) yields. A fund with short portfolio maturity, however, benefits as it can reinvest the proceeds in new bonds carrying higher yields. Moreover, its NAV will not fall as much as that of a fund invested in medium- and long-term bonds.

Now, as the market is still uncertain on the interest rate movements, Birla Income Plus has tried to strike a balance in its portfolio maturity. By doing so, the fund may enjoy some capital appreciation should interest rates fall and also get the opportunity to invest in high-yield bonds, should they rise.

Second, typically, the NAV of a fund catering to both the corporate and retail investors is expected to fluctuate wildly; for corporate investors tend to withdraw/invest large sums at short notice, leading to higher NAV volatility. Birla Income Plus, however, does not seem affected by this factor.

This can be discerned from the fluctuation (volatility) in NAV returns; the volatility since April has been below 7 per cent, except in July. This does not, however, mean that the volatility will not rise. The fund may be best suited for those willing to bear high-volatility risk.

Background: Birla Income Plus offers Growth and Dividend options. The fund does not charge an entry load but levies an exit load of 0.5 per cent if units are redeemed within three months of investment. The minimum investment for buying units is Rs 3,000.