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Ballistic Start

This fund has had a ballistic start, but even as we say that, we must point out that the value of an MIP having a ballistic start in the middle of a bull run is questionable.

It was the hottest MIP last year and is well on its way to repeat the feat this year as well. However, its high volatility might unnerve conservative investors. Investors with a long-term investment horizon would benefit from this fund's aggressive approach.

HDFC MIP LT had a festive beginning in December 2003 when MIPs were the flavour of the season. It started as the fourth largest fund with a handsome corpus of nearly 650 crore. It did not disappoint its investors and returned 2.06 per cent in the first quarter of 2004 to comprehensively beat the 0.87 per cent gain of an average peer. This saw its popularity soar, with the fund's corpus rising to nearly Rs 1,550 crore within six months of the launch. Currently, it's the second largest MIP managing around Rs 771 crore.

The fund's mandate to invest up to 25 per cent of its corpus in equities has proved to be a blessing under the star fund manager Prashant Jain. The equity markets' rally in the recent past has given the fund manager a good opportunity to exploit its mandate, as the fund has almost always kept its equity allocation above 20 per cent. In fact in the last eight months it has pushed the exposure further to close to 25 per cent. This along with nearly 47 per cent allocation to mid- and small-cap stocks since the start of last year has seen the fund's return zoom to 16.48 per cent in 2005-much better than 9.18 per cent return of an average peer.

On the debt side, active duration management is behind the fund's success. However, the fund does not take aggressive interest rate calls, with the maturity remaining below the category average on most occasions.

The fund does take some credit risk and regularly invest in lower rated papers to earn some extra returns.

However, the exposure remains restricted to single digit. Overall, high quality corporate bonds have always dominated the debt portfolio, with top-rated commercial papers playing the second fiddle of late. Initially, the fund used to invest in gilts but now they are out of favour.

A high equity exposure led by mid- and small-cap stocks, active duration management and exposure to lower rated papers have resulted into above average volatility for the fund. Expenses are high as well.

Worse, it has increased in the last one year to 1.93 per cent now. However, the fund more than compensates for its high risk and cost by earning one the best returns in the category.