Yield optimiser funds might make sense now

The US Federal Reserve has finally indicated that the US economy is showing signs of slowing, which enables it to reverse the rate cycle and start to cut interest rates. This usually impacts global markets as US investors seek higher yields overseas. In India, too, the rate cycle is widely expected to have peaked. The market now expects RBI to start reducing rates, though the timing is uncertain. Debt investors are advised to increase the duration of their bond holdings. For mutual fund investors, this means migrating to higher-duration funds. This will lock in the current yield and generate capital gains as bond prices rise. Double-digit returns are still unlikely from a bond portfolio. Unsurprisingly, this has generated interest in 'yield optimiser' funds - funds that invest in real-estate portfolios - like the AIF (Alternative Investment Fund) launched by ICICI Prudential Mutual Fund. The AIF that ICICI Prudential has launched claims to generate a pre-tax, pre-fee, indicative return of over 15 per cent through a portfolio that invests in office properties rented out to marquee tenants for over five years. At the end of this five-year period, the property will be sold off. The fund will take on debt equal to the invested amount to manage tax and enhance returns. Extending the computations using the figures in the presentation, one can arrive at a post-tax IRR (internal rate

This article was originally published on October 01, 2024.