Templeton India Income Fund: Invest

Recommendation: Invest

B. Venkatesh

TEMPLETON India Income Fund (Growth) has returned just over 8.5 per cent since January.

Though this is not exactly impressive, investors can stay with the fund; fresh investments too can be contemplated. This is because the period since January 2000 had been marked by a high degree of volatility in the debt market and this has affected the performance of income funds almost across the board.

Suitability: The fund may be suitable for those looking to make investments in a basket of fixed-income securities and willing to go in for steady returns with good liquidity.

Portfolio composition: The fund has around 44 per cent exposure in corporate bonds, 28 per cent in government bonds, 19 per cent in quasi-government bonds and the rest in cash/cash equivalents.

Investors may want to consider the following factors before buying into the fund. First, the average portfolio maturity of the fund at 3.58 years is higher compared with some other income funds. The implications? It means the returns generated by Templeton India Income fund will be lower should interest rates go up. This is because the fund will be unable to reinvest its proceeds at a higher interest rate. Moreover, the net asset value (NAV) of the fund will drop more because bond prices fall when interest rate goes up. By same logic, the fund will do well should interest rates rise.

So, where are the interest rates headed in the near term? While the market is still uncertain on the interest rate directions, available information suggests that rates are likely to remain stable for sometime to come. This means liquidity in the system will be the primary factor driving bond prices for the present. And with the RBI likely to maintain comfortable liquidity, bonds are unlikely to witness any steep fall in value from the current level. At the same time, buying interest may emerge in the medium and long-term bonds. All this may augur well for Templeton's Income Fund, given its relatively higher portfolio maturity.

Second, the fund has over 90 per cent in AAA-rated and sovereign securities. This means the portfolio's credit risk is low. On the flip side, lower credit risk means lower revenue generation from credit-spreads; credit spread refers to the higher interest rate that a corporate bond provides over a comparable government bond to compensate for the credit risk.

Third, the fund has not been indulging in pure passive portfolio management -- that is, buying and holding securities till maturity. This means it can be expected to take advantage of any favourable price changes in the market price of its portfolio.

A cause for concern, however, is the large corpus of Rs 972 crore due to unit-investments by the institutional investors. This factor may work against the retail investors. How? The fund may see sharp fluctuations in its NAV should institution investors deposit or withdraw large sums of money at short intervals. But it needs to be mentioned that NAV fluctuation has been within reasonable limits till now. On balance, one may consider buying into the fund for medium-term gains.

Background: Templeton India Income Fund, an open-end fund, offers growth and dividend options. The minimum investment required to buy units in the fund is Rs 2,000. An exit load of 0.5 per cent is levied if the units are redeemed within 6 months of investment. The current NAV of the growth option is Rs 15.81.