Unlike its peers, Tata MIP was carved out of another fund. It started life as the monthly income plan of Tata Income Fund and was spun off in December 2002. With consistent dividend payouts, one of the best Sharpe Ratios among MIPs and a good performance track record, this new kid on the block sports all the attributes that investors seek in an MIP.
The focus of Tata MIP's quest for returns has been on duration management of its debt holdings rather than on equities. Evidently, this is a result of its history as an income fund, albeit one that had a mandate for a 10 per cent equity exposure. Thus, unlike other MIPs, the primary risk here is of adverse interest rate movements. In fact, equities vanished from its portfolio in April 2002 and reappeared only in February 2003. During this period, the fund outperformed the category purely through duration management of its debt holdings.
Not that the fund has done badly out of its equity investments. Recently, some of its holdings like Lupin, United Phosphorus, Thermax and Crompton Greaves have gained handsomely and have been the drivers behind its excellent performance in Q2 of 2003. The fund's debt portfolio avoids high-yielding low-rated bonds and focuses on quality. Recently, the fund has been reducing its AAA allocation and moving sharply into gilts, where its exposure is now over 50 per cent.
The key to the fund's returns is active realignment of its maturity profile. For instance, it was able to increase maturity from 5.5 years to 8 years in the three months leading up to rate cut of October 2002. Similarly, when small-savings rates were cut in Budget 2003, its higher maturity of 5.2 years helped it outperform its peers. This, along with a high 27 per cent cash allocation, helped Tata MIP remain in black during the volatile first quarter of 2003. However, cash accounts for a high 34.4 per cent now and this could drag down returns as both debt and equity market are doing well.
Though Tata MIP has not maintained a high equity exposure, its high gilt exposure and higher maturity makes it one of the more volatile offerings among MIPs. Investors do need to be prepared for the occasional misfire, but the ability to deliver category-beating returns would please most.