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Change of Heart?

The largest bond fund has a history of category-beating performance and has gained an aggressive attitude of late. If HDFC Income maintains its quality fund management, then the new approach is likely to keep it at the top of the return chart

After a lifetime of cautious investing, HDFC Income has started taking big interest rate bets recently. On paper, it looks like a riskier strategy but with some deft management, it may just be what is needed to keep this fund at the top in a time of uncertain interest movements.

In the past six months, HDFC Income has maintained a high average maturity in the range of 6.84-8.12 years. Though it initially helped in clocking good returns in the mid-year rally, but has backfired in the volatile last quarter of 2003-it just gained 0.54 per cent in Q4 as against the category average of 0.85 per cent. However, the year's initial gains more than compensated for the recent under performance and the fund ended the year in the first quartile of the category. Perhaps this is the point of the new strategy—gain more on the upswings than what you are bound to lose in the downswings.

HDFC Income has stuck to quality portfolio through 2003, with gilts accounting for an average 55 per cent and the remaining 36 per cent invested in AAA-rated bonds. Sub-AAA bonds are just 2 per cent of the portfolio. However, initially, the fund was not so quality-conscious and held nearly 10-14 per cent in below-AAA bonds till mid-2001.

Though the fund has turned aggressive now, historically, it has largely stuck to conservative investment style. 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. Moreover, it has been more active in the past, sometimes making notable shifts when the markets turned volatile. For example, it successfully pulled out the rough patch of 2003 Q1 by first reducing its average maturity to 5.11 years in January and then extending it to 6.13 years thus capitalising on falling rates in February. Over Q1, HDFC Income gained 0.7 per cent as against category's 0.10 per cent loss.

If HDFC Income maintains its quality fund management, then the new approach is likely to keep it at the top of the returns chart. Of course, investors should enter this fund for at least a year or so. The tendency to treat all income funds as short-term will have to be forgotten if one has top reap the gains that are possible.