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Non-vanilla Gainer

ICICI Prudential Flexible Income Fund is worth a dekho for short-term investors with low risk grades

ICICI Prudential Flexible Income Fund was launched in September 2002 to take advantage of the interest rate movement by investing in either short-term or long-term securities and thereby deliver returns higher that the plain vanilla income funds. The fund chose the CRISIL Composite Index as its benchmark.

So, has the fund lived up to its mission? Well, yes and no. The fund has been more optimistic than other funds in its expectation of the interest rate movement. Its optimistic strategy worked in the first year but it backfired in the following years. The interest rates commenced their upward journey in 2004 and in 2005. And the fund, after being at the top of the league by giving returns of 9.68 per cent in 2003, dropped down the ranks. In 2004, it gave a measly return of 1.26 per cent and in the consequent years as well, the fund’s performance has been far from extraordinary.

Investors’ confidence in the fund also waned and during the period of November 2003 to March 2006, the fund lost more than 5000 per cent of its corpus. The then fund manager Mr. Rahul Goswami, to tackle the adverse conditions, brought down the average maturity of the instruments drastically. Since March 2006, the fund’s average maturity has hovered around 4.32 months compared to the category’s 1.02 years. This has made the fund the least vulnerable to interest rate movement as compared to others. The fund has posted an annualized monthly return of around 8 per cent per annum on a consistent basis.

The fund has at times been managed very passively. From March 2006, the fund has parked on an average as much as 61.87 per cent of its assets in bank deposits rather than working it in the market. It woke up only after April 2007, when SEBI ordered mutual funds to limit their investment in banks deposits. At present, the fund’s investment compromises of only four instruments including negligible exposure in bonds. Its investments are primarily into papers issued by finance companies. In the last couple of months, it has invested very heavily into commercial papers of ICICI Bank.

There has not been any case of concentrated holdings in this fund’s history except in the financial year 2006-07 when a single investor held 81.37 per cent of the fund. This kind of concentrated investment makes a fund’s performance very much dependent on a single investor, which is very unfair to other smaller investors. Fortunately, the fund has not witnessed any adverse impact because of such reasons.

The fund, with its lower than average maturity and low expense ratio is ideal for short-term investors who like consistent returns with low risk.