Principal Income Short-term Fund is one of the least volatile short-term offerings available in the market. While its returns have been a tad lower than some of its peers, lower volatility has been more than compensated for by one of the best-risk adjusted returns.
This fund has never taken excessive bets on maturity and thus serves the basic objective of protecting capital while generating moderate returns. While this moderation gave it a low profile in the bullish bond market of 2002, this year a moderate approach helped the fund shine brightly as bond markets turned volatile.
Launched in April 2002, Principal Income Short-Term, like other funds in the category, has a predisposition towards commercial papers. Initially, the fund took a liking to P1+ rated instruments. Since early this year, the fund has developed a preference for AAA bonds and by June 2003 the commercial paper exposure had declined to 17 per cent.
July 2002 so far has been one of the best months for the fund. The liquidity-driven rally on the back of a repo rate cut saw Principal Income Short-Term deliver the highest monthly ret-urn of 0.9 per cent till date. Just before the rate cut in October 2002, it picked up a small kitty of gilts. This helped the fund generate better returns in the bullish last quarter of 2002.
In the volatile first quarter of 2003, the fund continued to stay on the lower side of the maturity spectrum. Gilts—their exposure was reduced in January—moved out of the fund's portfolio in February. Thus, the fund's returns were a shade better than many of its more aggressive peers.
Just before the rate cut in April, gilts made a re-entry into the fund portfolio. However, in the recent past, it has been reducing its gilt exposure—from 6.8 per cent in April to 2.25 per cent in June. This has also led to a drop in portfolio maturity. As yields have been falling the fund has been trying to take advantage of higher coupon, lower rated bonds. Its below AAA component has thus doubled to 12.73 per cent by adding IDBI bonds to its portfolio.
In all, Principal Income Short-term is a fine blend of low expenses, steady returns and capital preservation. It deserves a place in the portfolio of any investor who has a short-term surplus.
This article was originally published on September 15, 2003.
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