Picking income fund for steady returns

B. Venkatesh

PICKING an Income Fund for investment can be extremely difficult these days.

This is because, prima facie, one fund may seem no different from the other.

The reason for this is that our debt market is not as liquid and deep as the equity market. This means Income Funds do not have many instruments to choose from and therefore tend to take exposures in mostly the same companies. What differs between funds is the quantum of investment that they have in each such company.

Given this, how does one choose an Income-fund? The answer depends on one's investment objective. Is it steady income you are looking for or more trading gains? By trading gains, we mean the fund generates more income by trading in bonds than by simply holding the securities and receiving interest on them.

Suppose you are looking for steady returns; first, you want to observe the changes in the fund's portfolio in the last one year. You can get the portfolio information from the fund's web site or a mutual fund broker. You may want to pick the fund that does not frequently change its portfolio since you are looking for only steady returns and not trading gains.

Next, you may want to check whether the fund has less exposure to government bonds. The reason? As government bonds fluctuate wildly, so does the fund's net asset value (NAV).

What about corporate bonds? Since these bonds are not frequently traded, funds notionally price these bonds on a weekly basis. The fluctuation in the NAV is, thus, lower. You may want to ensure that the fund you choose has a large portfolio of investment grade (with credit rating over A) corporate bonds.

Finally, you may want to ensure that the fund caters only to the retail investors and not to the corporate investors. Why? The NAV of a fund that caters to both investors may fluctuate wildly as corporate investors tend to invest/withdraw large sums at short notice. In essence, such funds ensure steady returns from a basket of low credit-risk bonds.