After launching Birla Dividend Yield Plus, Birla Sunlife Mutual Fund has launched another innovative product—Birla Bond Index fund. This is the first foray into bond indexing in the Indian mutual fund industry.
Birla Bond Index will track the Crisil Composite Bond Fund Index (CCBFI) The Crisil Bond Index in turn consists of five indices which represent the debt market. These are AAA index, AA index, Gilt index, CP index and Call index. The contribution of each of these indices to the CCBFI is derived from the average asset allocation of all long-term debt funds. So this fund will effectively represent the average long-term bond fund effectively serving the purpose of a fund of funds. Thus in the last one year ending April 17, 2003 the CCBFI has returned 11.62 per cent while the average bond fund has generated 11.56 per cent.
Unlike index funds which pick up all the securities in an index, Birla Bond Index fund will use a sampling technique to determine which securities best represent the index and invest in these. Under this, the fund manager will select a representative sample of securities that will resemble the full target index in terms of key characteristics like duration, credit risk, etc. As a result of this sampling the funds returns will not exactly match those of the underlying index. The fund management however, estimates that under normal circumstances the tracking error should not exceed 2-3 per cent.
But it's important to remember that index funds are not risk-free alternatives to actively managed offerings. For instance, the CRISIL Composite Bond Index also contains lower rated corporate bonds such as AA-rated bonds (9.81 per cent as on March 15, 2002). That apart, all bonds in the index will be affected by shifting interest rates. However, unlike other bond funds, which can vary their portfolio according to the relative attractiveness of different papers this fund will have to stay true to the index. The fund should thus replicate the returns of the index.
Normally index funds have a lower expense ratio than actively managed funds. In debt funds this becomes important as returns do not vary much. A lower expense ratio can make a considerable difference in returns over the long term. Thus it is estimated that recurring expenses as a percentage of average weekly net assets for this fund should be around 0.75 per cent which much less than that of actively managed bond funds.
The fund will be making the benefit of lower expenses available to all investors. The minimum investment amount has been kept at Rs 25,000. This is unlike institutional funds – the only other income funds, which charge lower expenses – where the minimum investment amounts are kept much higher. The scheme will not levy any entry load. An exit load of 0.25 per cent will be charged for investments up to Rs 10 lakh, which are redeemed within 90 days. The fund's IPO has opened on April 22 and will close on May 2.