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Managing Equities Well

More than reasonable returns for the risks taken is what renders Birla MIP a good choice for fixed-income investors. Deft handling of its equity portfolio is what differentiates this fund from others

Birla MIP gets the job done for investors who seek a regular income without leaning too heavily towards either caution or aggression. Its Sharpe Ratio—one of the highest in the category—clearly shows that returns have more than compensated for risks taken. Backing this performance is a disciplined approach towards managing both its stock and bond portfolio with more stability than many of its peers.

After starting off with a portfolio of top-rated corporate bonds in December 2000, Birla MIP has sought to augment its returns by focussing on sub-AAA instruments. With an eye over yield-spreads, the fund has actively switched between gilts and corporate bonds. As the spreads between AAA bonds and gilts has dropped since April this year, gilt exposure has increased from 12 per cent to 18 per cent (September 30). As a result, average maturity has risen from 2.3 years to 3.5 years.

However, as spreads between AAA and below AAA rated bonds has moved in a narrow range in recent times, there has not been a drastic change in the latter's allocation. These instruments do add to the credit risk of the portfolio. One of these, HUDCO, in which the fund has 2.74 per cent exposure, was downgraded from AA to AA- in March. In December 2002, Kotak Mahindra Primus, a top holding at 8 per cent, was also downgraded. However, Fund Manager K. Ramanathan points out that the HUDCO paper was a short-term investment and there was no impact on the fund. He says that the fund may continue to hold 15-20 per cent in these papers to improve current yield.

However, like all MIPs, it's the equity component which provides the kicker in its returns. In the last few months equity exposure has been increased to 13 per cent. While keeping a well-diversified portfolio across various sectors, the fund regularly books profits. It has thus been able to easily stick to its policy of giving regular dividends.

However, equities are volatile and the fund has at times posted marginal negative returns. Overall, the fund's portfolio is largely high quality. Investors with an appetite for regular income along with some growth of capital will be particularly pleased with this fund.