Kothari Pioneer Income Builder Account: Invest

Recommendation: Invest

B. Venkatesh

KOTHARI Pioneer Income Builder Account (Growth) returned around 9.3 per cent since this January. One may consider buying units in the fund as the returns compare well with other retail fixed-income investments.

Suitability: The fund is suitable for those willing to take a slightly higher credit risk to earn a higher return; the higher risk stems from the fund's 20 per cent exposure in below-AAA rated instruments.

Portfolio: As of November 30, the fund had around 69 per cent exposure in corporate bonds, 16 per cent in government bonds and the rest in call money and near-term instruments. The average portfolio maturity was 2.44 years.

Investors may want to consider the following factors before buying into the fund. First, the fund has a 15 per cent exposure in AA-rated and 4.9 per cent in A-rated instruments. How does this impact the fund's net asset value (NAV)? On the positive side, the fund can generate more income as AA-rated and A-rated instruments carry higher yields than AAA-rated instruments.

The flip side is that the fund carries a higher risk of companies defaulting on their payments. Of course, it needs to be mentioned here that the default rates in the AA and A-rated risk classes have been very low till now.

Second, the fund's average maturity period of 2.44 years is a marked decline from 3.57 years in April. This strategy suggests that the fund manager expects the interest rates to move up in the near term. The implication?

If the interest rates were to move up as expected, the fund may be able to invest in bonds that carry higher yields. But if rates come down instead of going up, the fund's future performance may be affected. How?

When interest rates go down, the existing bonds will rise in value to align itself to the lower yield. The rise in price will be, however, greater for long-term bonds. Income Builder Account may, hence, lose out on a likely rally as its portfolio is biased towards short-term bonds. Next, the fund may be forced to reinvest the proceeds at a lower rate, affecting its future performance.

The question is: Where are the interest rates headed in the near term? If one were to discern signals from the Reserve Bank of India's (RBI) policy initiatives, it appears that the interest rates are likely to remain soft for some time. A rise in crude prices may, however, work against the RBI keeping the rates soft. And with the crude price being a major cause for concern at present, the fund manager has, perhaps, thought it fit to maintain short portfolio maturity. In the light of the above factors, one may consider investing in the fund.

Background: Income-Builder Account, an open-end debt fund, offers dividend (payable monthly, quarterly, half-yearly and annual) and growth options. The minimum amount needed to buy units in the Growth Plan is Rs 10,000. The present NAV of the growth option is Rs 15.26 per unit.