Kothari Pioneer Income Builder Account -- Low risk, regular returns

Aarati Krishnan

RECOMMENDATION: The fund is a good investment option for investors with an investment horizon of one-two years.

Both price and credit risk on the portfolio are low. With annualised returns of around 14.9 per cent over the first quarter of 2000, the Kothari Pioneer Income Builder Account (IBA) has been one of the better performing bond funds in recent times. The returns compare favourably to the majority of competing debt schemes in the same period. The fund has a portfolio comprised mainly of corporate bonds at a time when most debt funds have a fair degree of exposure to gilts, and a short maturity profile of under two years.

Suitability: The fund is appropriate for investors seeking regular returns, and with a low risk profile.

Portfolio Status: Anticipating the steady decline in interest rates over the past quarter, several debt funds have significantly lengthened the maturity profile of their portfolios. The Kothari Pioneer IBA has been one exception to this trend. The fund has kept the average maturity profile of its portfolio short, at 1.74 years as of end of March.

The fund has taken the view that interest rates have more or less bottomed out and thus, are likely to look up over the medium term. While the shorter maturity profile could make for lower returns on the fund than some competitors which have opted for longer portfolio tenors, it reduces the degree of price that the fund carries.

Asset allocation: The IBA has a larger proportion of corporate bonds in its portfolio than is the current practice with debt funds. As of end of March, the fund was 61 per cent invested in corporate bonds, with just 7 per cent in gilts and the balance held in the form of current assets.

Over the past six months, most debt funds have acquired a large exposure to gilts, in order to take advantage of the trading opportunities resulting from volatility in gilt prices. That the IBA's portfolio is comprised mainly of corporate bonds, could make for lower liquidity and fewer trading opportunities for the fund managers.

However, advantages could be a lower price risk and NAV volatility on the portfolio. With a conservative rating profile, the portfolio carries a low degree of credit risk. By March end, 87 per cent of the assets were invested in bonds rated AAA or equivalent, while 11 per cent was in bonds rated AA. The balance was in bonds rated A.

Fund Performance: Returns on the IBA since inception, amount to 13.8 per cent per annum. Returns over the past one year amount to around 12.5 per cent. In the quarter ended March 31, the fund managed annualised returns of around 14.9 per cent. There has been a slowdown in the performance of the fund after March 31. This is probably on account of the fund's substantial allocation to current assets on that date. The fund held around 29 per cent of its assets in the form of current assets by end of March. The large near-cash position could be a temporary phase, as the fund prepared to pay out dividends for the year. The fund has recently declared a dividend of 12 per cent on the dividend option of the IBA.

Facts: The IBA was launched in June 1997. It is an open-ended scheme which levies no load, either on entry or exit. It offers a choice of monthly, quarterly or half-yearly dividend payouts to investors. The fund appears to have received substantial fresh inflows over the past one year. With its net assets currently at Rs. 380 crores, the fund is still one of the smaller debt funds in operation, which should provide for considerable flexibility.