In a short span of less than three years, HDFC Income Fund has consistently beaten a large number of its peers. The fund's handsome gain of 14.83 per cent annually since launch has padded investors' pockets nicely. It has achieved this by maintaining a good quality portfolio and through cautious duration management.
However, initially, the fund was not so quality-conscious and held nearly 10-14 per cent in below-AAA bonds (till mid-2001). It even underperformed its peers in the initial months.
Corporate bonds were HDFC Income's staple investment at the start, with gilts accounting for below 30 per cent exposure. Beginning 2002 gilts entered its portfolio in a big way. With consistent fall in the spread between gilts and corporate bonds, the fund has hiked its gilt exposure to over 50 per cent recently. Shifting its focus towards quality, the exposure to below AAA bonds has been kept at 2.27 per cent. Owing much of its success to a conservative style, this fund believes in small interest-rate bets. For instance, in the past one year, its average maturity has moved in the 5.11-6.3 years range. Even during the October 2002 rate cut, the fund's average maturity (5.87 years) was on the lower side in the category. Despite that the fund managed to beat almost two-third of its peers in 2002.
HDFC Income doesn't indulge in active trading and follows a buy-and-hold strategy. More importantly, it has reduced risk by spreading its portfolio across 40-50 securities. This strategy helped the fund overcome the recent volatility in the bond market. In the first quarter of 2003, while HDFC Income gained 0.7 per cent, the category lost 0.02 per cent. The reason for this fund's outperformance was active portfolio re-alignment. It reduced its portfolio maturity from 5.55 years in December 2002 to 5.11 years just before the yields went up in January this year. And following the small-savings rate cut— courtesy Budget 2003—and the subsequent cut in repo rate, HDFC Income raised its maturity to 6.13 years, thus, gaining massively.
Thus, the fund has managed to achieve one of the best risk-reward profiles in the group. HDFC Income has displayed its strength in both bullish as well as volatile markets. Those seeking above-average returns with moderate risk will do well here.
This article was originally published on July 08, 2003.
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