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Discipline Pays

A disciplined approach to credit and interest rate risk makes Principal Income one of the most effective funds in the debt funds' category

A disciplined approach to credit and interest rate risk makes this fund one of the most effective offerings in the fixed income category.

In the past we have expressed concern over the high expense ratio maintained by the fund, and there has been a slight improvement on this front. However, the ratio still continues to be on the higher end.

The fund manager's reaction to the hawkish monetary policy adopted by the central bank has been to play it safe. After the first CRR hike in December 2006, the average maturity of holdings was reduced. On the back of this prudent move, subsequent CRR hikes did not dent the returns of the fund significantly. During market rallies, the fund may not post supernormal returns as it has rarely stretched out too far on portfolio maturity. In fact so far the fund has moved consistently, in tandem with the category average, without causing any heart burns.

The fund has also shown an ability to handle sudden spurts in assets very well. In December 2006, the assets under management zoomed to Rs 662 crore from Rs 45 crore, only to reduce to half (Rs 313 crore) within a short span of three months. The fund manager's modus operandi was to place this corpus in less volatile commercial paper. By May the fund manager changed gear to focus again on higher maturity corporate debt.

Principal Income is a quality player. The portfolio keeps oscillating between AAA papers and gilts. Within corporate bonds, the fund has been ignoring relatively riskier low rated papers.