Sundaram Mutual Fund will soon come out with an open-end high-yielding bond fund - Sundaram Income Plus. The fund will primarily invest in high-yielding debt securities, i.e, 65-100 per cent in AA and below rated corporate bonds.
At the first instance, one would associate these funds with high risk, as they are more susceptible to default. But investment in low-grade instruments is not always fraught with high credit risk. RPL was not an AAA rated paper for long but investment in it was almost fail-safe. All said and done, they are low-grade instruments and hence an objective selection of such papers is a must for the fund to be a success.
The fund is expected to yield returns higher than those bond funds that invest mainly in high quality paper. The yield associated with AAA rated papers is almost 150 basis points lower than that on AA rated debt paper. Tata Income, which invests almost 39 percent of its assets in AA and below rated corporate bonds, has posted a decent since launch return of 13 percent. But this fund will be more aggressive – almost two thirds of its assets will be invested in such paper.
These bonds are criticized not only for the higher risk associated with them but also for their illiquidity. As there is no regular and established market for them, the fund will have to hold these instruments till maturity. Consequently, it has proposed to charge a higher CDSC of 2 percent (if redeemed before 1 year). To meet its liquidity requirement, the fund will allocate a certain portion of the fund in gilts and top rated liquid corporate/PSU bonds. The balance will be invested in money market instruments. Also, the fund will disclose its portfolio on a half-yearly basis. This is too long a period and will keep investors aloof of their fund's portfolio for six months, which could make it less attractive.
Medium-term bond fund has been the core of the debt fund category. But many new categories have evolved around the core. The periphery comprises of the short-term debt funds, medium & long-term gilts, short-term gilts and cash funds. Aiming to provide a little extra in an environment of falling yields, the fund is probably just another of its kind in the periphery.
The Mutual already has a bond fund – Sundaram Bond Saver, which invests almost half of its assets in high quality corporate bonds and commands nearly 84 percent of the assets under management. The fund family will now offer two different bond funds with entirely different portfolios. It is for you to make your pick.
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