NFO Review: Indiabulls Income Fund
Feb 19, 2013

Author: PersonalFN Content & Research Team

Indiabulls Income Fund

A fund that seeks to generate a steady stream of income and / or medium to long term capital appreciation by investing in various fixed income instruments.

Summary

Type: An open-ended debt scheme

Face value: Rs 10
Benchmark Index: CRISIL Composite Bond Fund Index

Min. Investment: Rs 5,000 and in multiples of Rs 1 thereafter
Min. Additional Investment: Rs 1,000 and in multiples of Rs 1 thereafter
Min. SIP instalment:
For Monthly contribution (of min. 12 instalments): Rs 1,000 and in multiples of Re.1/- thereafter
For quarterly contribution (of min. 4 instalments): Rs 3,000 and in multiples of Re.1/- thereafter

Entry load: Nil
Exit load: 1% if exit is within 6 months;
0.5% if exit is after 6 months and within 1 year;
Nil, if exit is after 1 year

Expense ratio: Upto 2.25%

Plans Offered:

Direct Plan: The investors opting for this plan would apply directly to Asset Management Companies (AMC) without routing their applications through distributors. The expense ratio of direct plan would be lower since no commissions will be paid to any broker.
Indirect Plan: Investment under this plan will be routed through brokers and will have higher expense ratio as compared to the Direct Plan.

Note: Net Asset Value (NAV) of the fund would be calculated separately under both the plans, but the salient features of the scheme and the portfolio for both the plans would remain the same.

Options offered:

Growth Option
Dividend Option

Issue open date: February 12, 2013
Issue close date: February 26, 2013

Investment Objective*

The primary investment objective of the Scheme is “to generate a steady stream of income and or medium to long term capital appreciation/gain through investment in fixed income securities.”

However, there can be no assurance that the investment objective of the Scheme will be achieved.

(Source: Scheme Information Document)

Is this fund for you?

Indiabulls Income Fund (IIF) is a debt oriented income fund from the stable of Indiabulls Mutual Fund, who is relatively a new player in the Indian mutual fund industry (setup in March 2011). Since then, the fund house has predominantly launched debt oriented schemes and launched its maiden equity scheme – “Indiabulls Blue Chip Fund” on January 20, 2012. And in the last almost a couple of years of its existence the fund house has been managing assets on an average of about Rs 2,553 crore of which 77% constitutes to be in debt mutual fund schemes, and the rest (i.e. 23%) in equity mutual fund schemes (as per the data disclosed on December 31, 2012).

The launch of the fund seems appropriately timed, when the RBI has now started reducing policy rates to address to growth risk and has also reduced the Cash Reserve Ratio (CRR) thereby injecting liquidity in the system. In the guidance of the 3rd quarter review of monetary policy 2012-13 (held on January 29, 2013), the central bank has signaled that going forward monetary policy will give greater emphasis to growth risks, but the stance would be conditioned by growth-inflation dynamic and the management of risks from twin deficits. So given that and taking into fact that at present WPI inflation has mellowed to 6.62%, policy rates may be gradually reduced going forward if moderation in WPI inflation appears. On the twin deficit worry, the RBI in our view would be watchful about what the Government enunciates in Union Budget 2013. In the next mid-quarter review of monetary policy (schedule on March 19, 2013), it appears unlikely that the RBI would reduce rates, but in monetary policy 2013-14 (scheduled on May 3, 2013-14), the RBI may reduce rates.

Thus in the backdrop of the above, one may invest into income funds, provided one is looking at an investment horizon of at least 1 year. A gradual descend in policy rates would benefit, if the fund holds longer maturity papers while it invests in various fixed income securities.

Portfolio & Investment Strategy

Being an income fund, IIF will invest in various debt and money market instruments and also invest in securitised debt (not exceeding 50% of the net assets of the scheme), including repo in corporate debt securities. Thus the list of debt instruments where IIF will invest would include:

Collateralized Borrowing and Lending Obligations (CBLO)
Certificate of Deposits (CDs) of scheduled commercial banks and development financial institutions
Commercial Papers (CPs)
Repos in Corporate Debt Securities
Reverse Repo
Treasury Bills (T-Bills)
Government Securities (G-secs) issued by both Central and State Governments
Non-Convertible Debentures (NCDs) and bonds
Floating rate instruments
Pass Through Certificates (PTCs)
Securitised assets

As far as the allocation between debt and money market instruments is concerned, IIF will allocate its assets as under:

Instruments	Allocation Range	Risk Profile (High / Medium / Low)
Debt instruments and securitized debt* including Repos in Corporate Debt Securities	65%-100%	Low to Medium
Money Market Instruments	0%-35%	Low to Medium

(Source: Scheme Information Document)

By investing in the aforesaid debt and money markets instruments, IIF aims to generate steady returns with a low-risk strategy. IIF endeavours to maintain a balance between safety, liquidity and profitability aspects of various investments thereby trying to achieve an optimal risk balance while managing its portfolio. While building the portfolio, IIF will consider:

Prevailing political condition
Economic environment
Interest rate cycle
Inflation
Performance of the corporate sector
Liquidity conditions
Individual security analysis
Yield-to-Maturity of the instruments
Yield curve analysis
Credit ratings
Credit spreads

It is noteworthy that while following its mandate and asset allocation pattern, IIF may also use derivative instruments (such as interest rate swaps like Overnight Indexed Swaps (OIS), forward rate agreements, interest rate futures as and when permitted vide applicable regulations. In case of interest rate swaps, IIF will be allowed to take exposure only on a non-leveraged basis. Otherwise too, exposure to derivatives will be used for hedging and portfolio balancing or such other purpose as may be permitted under the regulations and guidelines from time to time.

IIF will benchmark its performance with Crisil Composite Bond Fund Index, thus the fund intends to invest in a portfolio of instruments which is best captured by Crisil Composite Bond Fund Index.

It is noteworthy that Crisil Composite Bond Fund Index, is a realistic estimate to track the returns of an Income Fund at a particular return and risk level and hence is used as a benchmark by most market participants.

Fund Manager Profile

The fund will be managed by Mr. Raju Sharma, who holds over 20 years’ experience in the financial services industry and has to his credit a degree in commerce (B.Com), law (LLB) and is a Chartered Accountant (CA) from the Institute of Chartered Accountants of India (ICAI). Mr Sharma has exposure to fixed income management, investment banking and debt broking amongst host of other related spheres. Prior to working with Indiabulls Mutual Fund, he was worked as a senior fund manager and head cash & Hybrid Funds with Tata Asset Management Limited.

Apart from Indiabulls Income Fund, he is responsible for managing Indiabulls liquid Fund and Indiabulls Ultra Short Term Fund.

Fund Outlook

As mentioned earlier, IIF has been launched at an opportune time when RBI is likely to reduce policy rates to address to growth risk. But now what remains to be seen is whether WPI inflation indeed mellows down as per RBI expectations and twin deficit worries are addressed to, by enunciating prudent policies and allocating wise a Budget.

The fortune of fund would be closely linked to how the fund manager plays the interest rate cycle well, evaluates yields curve analysis and thereafter positions the portfolio appropriately. At present, longer maturity papers are witnessing softening in yield due to guidance given by RBI. The 8.15% 2022 10-Yr G-sec bond is placed at 7.82%. However shorter maturity papers – especially 1-month and 3-month CDs are under pressure since liquidity is yet appearing tight with LAF borrowing over Rs 1,00,000 crore. With central and the state Government borrowing Rs 48,000 crore and Rs 20,000 crore respectively, we expect it to remain tight further. Likewise with forward dollar-rupee contracts maturing and advance tax payment in mid-March 2013, there would be strain on liquidity conditions.

Hence we may not see a swift debt market rally as we witnessed in the recent past, but the conditions still look appealing to make decent gains in income funds. The key for success of IIF will be will be to spread the debt portfolio across maturities.

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