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Interesting MIP Look-alike

HDFC Multiple Yield is not an MIP, but is an ideal option for those looking for an MIP-like portfolio…

Upfront, let’s state that this is not a monthly income plan (MIP). It does attempt to pay dividends annually though it refrained from doing so in 2008 and 2009. So why are we talking about it? Because it is still an ideal option for those looking for a portfolio similar to what they would find in an MIP: a low equity allocation (limited to a maximum 25%) in a predominantly debt portfolio.

The remarkable performance of HDFC Multiple Yield over the past two years has shoved it into the limelight. In 2009, the fund posted a gain of 21.13 per cent (category average: 14.88%). In 2010, it was ranked 7th in its category (Hybrid: Debt Conservative) of 57 funds.

Unlike MIPs which can drop the equity allocation to a minimal level, this fund limits it to 15 per cent on the lower side. Even during the downturn of 2008, the equity allocation did not dip lower and since then has averaged at around 19 per cent. Within this allocation, it tilts towards high dividend yield mid-caps. In fact, the current weighted average market capitalisation at Rs 4,548 crore of the portfolio puts it amongst the lowest in its peer group. Though the number of stocks hovers at around 17, it is still lower than the category average of 28. In fact, the top 5 equity holdings account for more than half of the fund’s equity portfolio.

On the debt side, irrespective of the interest rate scenario, the fund invests in debt securities with a maturity of around 1 year and will hold them till maturity. The fund does not take high maturity bets and the average maturity of the portfolio has never gone above 1 year in its entire history, barring February 2005. Currently, it stands at around 0.63 years, on the lower side of the category average. Little wonder that the fund never invested in GOI securities ever since August 2005.

This strategy along with high quality paper is in line with the fund’s focus on minimizing the chances of capital loss while providing positive returns over the medium term. In the four quarters when its category has delivered negative returns, the fund has managed to stay in positive territory in two of them and contain its losses at a lower level in the other two.

But this has also led to missed opportunities such as December 2008 when the 10-year benchmark yield touched a historic low causing the fund to underperform the category average by a significant margin. The fund has consistently maintained its expense ratio at 1.75 per cent.