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Debt Funds With Panache

All debt schemes are not staid, some are great investment avenues

This article appeared in the 15 December - 14 January, 2009 edition of Mutual Fund Insight.

Innovation is the key to flourishing in this business. While there are no dearth of ‘innovative’ schemes on the equity side, replicating the same on the debt side is difficult.

Liq-uity from Bharti AXA Mutual Fund is one such product that stands out. Here’s how it works. Investors would have to invest a minimum amount of Rs 1 lakh in Bharti AXA Liquid Fund (BALF) or Bharti AXA Treasury Advantage Fund (BATrAF). If it is the dividend option that investors have selected, then the dividend declared on a daily basis will get automatically get transferred to their diversified equity scheme - Bharti AXA Equity Fund. If it is the growth option, then the daily appreciation in net asset value (NAV) is what gets transferred.

To effect the switch, the units in BALF/BATrAF will automatically get redeemed to the extent of the daily appreciated amount and the latter will be invested in the equity fund.

What’s the purpose? You get to keep your capital safe and liquid while the gains can be shifted to an equity fund. The gains moving to an equity fund utilise the concept of daily systematic investing (SIP) without tapping on additional savings. A great option to park your short-term surplus cash.

Below we have worked out the numbers. If you had invested Rs 1 crore for a year, the daily dividend, which is declared only on business days, would have varied from a minimum of 0.007421 per cent (Rs 742.1) to 0.0743513 per cent (Rs 7,957.49). And over 12 months, it amounts to a tidy sum.

DWS Money Plus Advantage Fund from Deutsche Mutual Fund also follows the same philosophy of combining adding an equity opportunity to a debt investment. This time around, the investment is not into another equity fund, but is an actively-managed equity portfolio. The fund maintains a minimum allocation of 90 per cent to debt, including money market instruments, securitised debt and government securities. The weighted average duration of the fixed income portfolio would be less than one year. The equity allocation, which will be a maximum 10 per cent, will be mainly restricted to open offers, delisting opportunities and initial public offerings (IPOs). The fund manager will also use arbitrage opportunities by buying stocks in the secondary market and tendering them in the buyback offer. Some examples of successful previous bets are Cambridge Solutions (held for 134 days), BOC India (101 days), Spice Communications (97 days) and NDTV (96 days). 

How does an investor gain? The debt allocation generates a stable and consistent return while the equity portion gives it that extra punch.