Prudential ICICI has floated a new kind of bond fund -- Pru-ICICI Flexi Income Plan (FIP). Unlike most other bond funds with a clearly defined portfolio focus, FIP's portfolio focus will be the manager's discretion. The fund will have the flexibility of investing in long-tenure bonds to capitalise on rising bond prices and will attempt to escape fall in a volatile market by shifting to money market instrument and reducing its portfolio maturity.
The investment ambit of the fund will be the virtually any Indian bond. It can own bonds maturing in less than a year, a 30- year gilt, or a lower rated bond. The rationale for such a fund now is the end of unidirectional bond market. With steady decline in interest rates, the fund expects the interest rates to be rangebound and move in both directions in a narrow range. This is likely to throw profit opportunities for a fund with such flexibility.
FIP could be especially convenient for active bond fund investors, who realign their fund portfolio based on their view on interest rate outlook. Besides, it will be a tax-efficient, as you won't have to worry about gains realised for your moves like bond fund to a cash fund or vice versa. It matters as you can escape the short-term gains added to your income and taxed at higher rates otherwise.
On the negative side, the fund performance will rest heavily on its ability to call on interest rates. And its getting challenging with interest rates in basement. This strategy could also add to its turbulence when it makes a move. The other fund with a similar strategy at work is Grindlays Dynamic Bond Fund. But this too lacks history, having been launched only a couple of months ago.
Flexible Income Plan is novel offering for the sensitive fixed income investor but an untested one. Let's see.