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On The Fast Lane

IDBI Principal Income, which seeks to generate regular income and capital appreciation, will satisfy long-term investors. Its year-to-date return of 5.57% is better than its medium-term peers.

It can easily get a swollen head, considering since launch it has underperformed its category once. At first glance, anyone can notice that IDBI Principal's biggest strength is its stable performance. With a 1-year return of 13.61%, this 4-star winds up in the top-half of its category. Its YTD return of 5.57% is a shade better than its peers. Fine performance may be a likeable attribute, but one things needs to be understood that this fund has seen a bullish market till now.

A heavy bias for AAAs and gilts -- accounting for 35.89% and 25.32%, respectively, of the portfolio -- weakens its position when rates rise and make it more volatile when bond markets crash. So far its high-quality focus hasn't been a wrong call. But lately the fund has allocated some space to AA- bonds in its portfolio, though an apologetic 2.28%. It's all right if one is conservative but when the economy looks up, lower rated bonds can send your returns into the orbit.

Taking full advantage of rate cuts last year the fund maintained a high exposure to gilts (averaging over 34%). Despite maintaining an average low gilt maturity, it has beaten hollow its category. Since February 2001, it has been courting longer-maturity gilt offerings. By actively realigning its portfolio, this fund remained in the black during panic-selling in September post-9/11, while its rivals bled. However, in May 2002, it was unsuccessful in guarding its downside and went below the category average.

What needs to be noted here though is that the fund's asset base has doubled in one year but it has been accompanied by sporadic swings. For instance, in March it saw a huge outflow of Rs 167 crore due to redemption but after that it maintained a steady climb and in June it added Rs 70 crore to its kitty. But with higher than average expenses, this fund needs to take on credit risk to produce competitive yields.

Overall, its record of success in a short tenure offers a good reason to have faith in this fund.