Maintaining quality

FUND PICK: HDFC Income

HDFC Income is suited for investors with a long-term target.

HDFC Income was launched in August 2000. It does not charge any entry load. However, it levies an exit load of 0.50 per cent for redemption within 180 days and investments up to Rs 10 lakh. The minimum investment is Rs 5,000.

The past few quarters have been tough for the fund. It ended 2004 in the bottom half of the category. The fund with year-to-date return of 2.92 per cent (as on July 26, 2005) is behind the category average return of 3.24 per cent.

The trouble started in 2003 when the fund deserted its cautious investing approach and started taking big interest rate bets. Initially, it clocked good returns in the mid-year rally.

An average maturity of 8.09 years against the category average's 5.77 years backfired in the volatile fourth quarter of 2003 "� the fund gained 0.89 per cent in the fourth quarter against the category average of 1.14 per cent.

However, the year's initial gains saved the fund in 2003 when it managed a place in the first quartile of the category.

The fund was not as fortunate in 2004. It underperformed the category in all the four quarters. For the first time, it actually lost money in a calendar year.

However, the fund has a category-beating long-term performance record. It maintains a high quality portfolio and deserves a better treatment. HDFC Income stuck to quality portfolio through 2003, with gilts accounting for an average 55 per cent and the remaining 36 per cent invested in AAA-rated bonds.

Sub-AAA bonds are just 2 per cent of the portfolio. However, initially, the fund was not so quality-conscious and held nearly 10-14 per cent in below-AAA bonds till mid-2001.

In the recent past, the focus has shifted from gilts to corporate bonds with the former accounting for only 15.42 per cent of assets.

The fund tries to maintain quality through the way it manages its corporate bond portfolio. AAA papers form over two third of the portfolio, while the fund is yet to invest in below-AA+ papers.

The fund is basically good and will tide over the current dry period. Investors should enter the fund for the long term.

"�Value Research

Returns as on July 27, 2005 (%)

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Banking sector funds got a boost in the past month with the category topping the sectoral fund averages during the period.

The BSE Bankex was the biggest gainer in the past month with returns of 20.05 per cent, which got reflected in the performance of banking sector funds.

The sectoral average returns for the past month stood at 15.86 per cent, while the next best performers were FMCG funds (11.16 per cent) and tax-planning funds (9.87 per cent).

However, FMCG funds continued to top the yearly return table, posting an average return of 80.12 per cent.