The Hindu Business Line : Income funds: Turn for the better

Higher yield on equity over the past few years persuaded investors to direct a bulk of their investment towards this asset class. The investment terrain for equity is not going to be as smooth as it was for the past few years. Diversification to debt is one of the better options available to investors in the current uncertain period in the markets.

Income funds invest in debt securities with varying maturity periods. With the rapid fall in inflation and general slowdown in the economy, interest rates may move southwards. Income funds which invest in longer dated instruments gain during periods of falling interest rates, as bond prices rise.

Portfolios: Income funds invest in both short- and long-term debt securities of the government and corporates . Government securities provide safety and liquidity, while corporate securities are held to earn higher returns. Some funds take exposure to pass through securities to earn higher yields.

Funds holding securities of higher average maturity, with the current high interest rates, can earn better returns than those holding short-term paper, given the softening of interest rates.

With the advantage of long-term capital gains (LTCG) in debt schemes (in debt securities indexation benefit can be availed if the investments are held for more than 12 months, and it is 20 per cent of LTCG) it might offer superior returns in comparison to pure fixed deposits if one is in the highest tax bracket.

Over the last five-year and three-year periods, the top performing debt funds generated a return of 16 per cent and 10 per cent respectively while the category average returns were 5 per cent and 5.7 per cent. Canara Robeco Income Fund growth option was the top performer in this category for five-, three- and one-year periods. For a one-year period it generated 21.8 per cent.

At the other end of the spectrum, JM Income Fund was the worst performer, generating -2.7 per cent for the same period. Over a five-year period funds such as Magnum Income Plus Saving, DBS Chola Triple Ace, JM Income Fund and BNP Paribas SD Dynamic were the ones in the bottom of the returns table.

Profile: Some of the schemes have substantial exposure to NBFCs (non-banking finance companies), realty and PTCs, some of which have been a point of concern with investors relating to portfolio quality. Funds at times take concentrated exposure. In the Kotak Flexi Debt Fund’s portfolio it accounted for 40 per cent of the assets. Some schemes have exposure to realty companies such as Sobha Developers and Unitech. However, funds such as HDFC Income have predominantly invested in triple-A rated securities.

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