The fund had an auspicious start in October 2000 when interest rates started to drop. Principal Income grabbed the opportunity. It played some concentrated bets in government securities (an average 35 per cent in 2001) and clocked smart gains during the two rate cuts in early 2001. The fund ended the year in the top quartile. This performance was repeated every time interest rates fell-during November 2000 to December 2001 and May 2002 to January 2003. During market rallies, it may not have posted supernormal returns like some other funds as it has rarely stretched out too far on portfolio maturity. The next two years were also lucrative for its investors. As on August 16, 2005, the fund has returned 3.72 per cent, better than the category average return of 3.37 per cent.
What makes this fund special is the way it manages the downside risk. The fund manager senses forthcoming volatile situations much better than peers. So, whether it was the sudden spurt in interest rates in December 2001 or May 2002, it lost less than peers. In 2004 too, the fund managed a place in the top half of the category.
Principal Income is a quality player. The portfolio keeps oscillating between AAA papers and gilts. At present, the focus has shifted to corporate bonds. Within corporate bonds, the fund has been ignoring relatively riskier low rated papers. The fund's exposure to these issues has come down from an average 11 per cent in 2002 to 2.37 per cent in July 2005. The top rated corporate bonds continue to account for as much as 43 per cent of the fund's assets. Another 39 per cent is allocated to gilts.
The only concern here is that the fund has been expensive. At 1.82 per cent, it's expense ratio is much more than the category average of 1.47 per cent. Earlier, when income funds used to deliver double digit returns, this difference was not noticeable, but today the situation is different. At a time when income funds are struggling to beat even the returns of cash funds, a few basis points difference mean a lot. Nevertheless, the fund's consistent performance record makes it one of the better funds in the category.
This article was originally published on March 10, 2005.
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