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IDFC Medium Term Fund
In recent months, gilt funds have kindled the interest of investors looking to participate in a possible rally in the debt market, when interest rates fall. But the illiquid nature of many of the government securities, their long-term maturity and the ensuing volatility make pure gilt funds less suitable for retail investors who cannot time their way in and out of these products.
But if you are still keen on taking some exposure to this segment of debt with relatively lesser risks than pure gilt funds, then IDFC Super Saver Income Fund Medium Term (IDFC SSI Medium Term) may be a good option. With a return of 9.3 per cent compounded annually over the last five years, the fund comfortably beat its benchmark Crisil Short Term Bond index return as well as category average return of 7.5 per cent annually. This return is also higher than Crisil 10-year Gilt index return of 6.1 per cent, suggesting that pure gilt may not return too well in the long term.
Suitability
Despite limited exposure to long-term gilt, IDFC SSI Medium Term requires some risk appetite on your part. For one, about a fourth of the portfolio is exposed to gilt. Any volatility in this segment or wrong forecast on interest rates can hurt fund returns. Two, the fund has a portfolio maturity of three-plus years. Instruments with longer maturity are more sensitive to interest rate movements. Three, the fund has a high proportion (60 per cent) in corporate bonds. While these have a rating of AA+ and above, they are not free of risks and do not have any sovereign guarantee.Overall, the fund will have a higher degree of interest rate risk, although it exhibits lower credit risk.The fund is suitable for investors with a time horizon of over two years. Ideally, we would prefer this fund to be part of your long-term portfolio. The fund has an exit load if you redeem within 9 months.
Performance
IDFC SSI Medium Term's rolling return record in the last three years was top notch, with the fund beating its benchmark 100 per cent of the time. That means, irrespective of when you had invested in the fund in the last three years, you would have beaten the benchmark. While the fund cannot boast of a similar record since its inception in 2003, to its credit, it has not had any negative-return stints on a one-year rolling return basis.
In the past year, quite a few income funds have managed 11-13 per cent one-year returns compared with IDFC SSI Medium Term's 10.2 per cent. Templeton India Income Builder is an example.
But the latter has managed this by not only donning a longer maturity profile but having instruments with slightly lower credit ratings compared with IDFC SSI Medium Term. That means those funds take on both interest rate risk and credit quality risk to generate higher returns.
On a rolling return basis though, IDFC SSI Medium Term's average one-year return (over three years) of 8.6 per cent is higher than some of the current chart toppers. This suggests that the current out-performance by peers may not always be sustained.
IDFC SSI Medium Term can be expected to benefit from any gilt rally that may happen before March 2013 if interest rate cuts happen.
Portfolio
The fund currently has 24 per cent of its assets in government bonds and 60 per cent in corporate bonds. The rest are in commercial papers and other short-term debt.
A good 86 per cent of the instruments held are AAA-rated. A number of corporate bonds are from PSUs such as REC and PFC, besides other NBFCs such as L&T Finance and Mahindra & Mahindra Financial Services. The fund is managed by Mr Anupam Joshi.
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