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On the Ascent

Birla Income Plus has adjusted well to the volatility in bond markets. A fine blend of performance, stability and moderate expenses makes this a suitable candidate for any bond fund portfolio.

One of India's oldest bond funds, Birla Income Plus has, been continuously improving its performance. It ended 2002 in the first quartile while posting above-average returns for the last two years.

As bond markets have rallied in recent years, the fund has steadily been increasing portfolio maturity. This has been achieved by increasing the gilt allocation. In May 2001 both the average maturity and gilt allocation also peaked.

However, the fund has also been sensitive to volatility in bond markets. After 9/11 when markets turned volatile the fund reduced its portfolio maturity, but this was not as much as some peers in the category. With the forex inflows driving bond markets in 2002 Birla Income Plus has aggressively pursued gilts, taking the portfolio maturity to an all-time high of 6.91 years in December 2002.

Corporate bonds, particularly AAA papers, have generally accounted for 35-40 per cent of the portfolio. While this has added to portfolio stability, the fund has varied allocation based on the paper's relative attractiveness. Thus, in end-2002, since it expected spreads to go up Birla Income Plus reduced exposure to corporate bonds.

The fund has also maintained an exposure to below AAA papers. In 2000, when bond markets were less bullish, below AAA papers formed a fifth of the fund's portfolio. By 2002 as trading profits from gilts took the lead in providing returns credit management became less important.

Exposure to below AAA papers thus came down to an average 8.71 per cent in 2002. With interest rates having almost bottomed out lower-rated papers could once again hold the key to higher returns. Hence, from a low of nearly 5 per cent in end-2002 below AAA exposure had moved up to 9 per cent by March 2003.

When markets turned volatile as in January this year the increasing maturity exposed the fund to above-average losses. However, it turned in a stronger showing in March to end the quarter with losses in line with the category.

Birla Income Plus fits well in terms of three critical parameters of risk- adjusted returns, volatility and expenses. It is a fine choice for fixed income investors who prefer the mutual fund route to investing.