RELAUNCH OF AIG SHORT TERM PLAN
For quite some time, we have been dissuading our clients from taking any interest rate calls in their portfolio & goading them to invest in high accrual low duration Short Term Plans. In this segment we had recommended from time to time investments in Templeton India Short Term Plan, Religare Short Term Plan & Birla Dynamic Bond Fund with their respective strategies of high accrual through PTCs/ lower duration & higher CD exposures.
Now time has come to start taking some duration calls with an aim to earn both a) high accrual & b) some capital gains in your portfolio. Lot of bad news has already been discounted which is evident in the steep yield curve between 1 day & 5 years (specifically for Short Term Plan portfolio allocation). Market has already started pricing in CRR hike/REPO-Reverse REPO rate hikes, higher food inflation, possibility of issuances of MSS Bonds, etc. If food inflation comes under control in the near future, there might be a positive surprise in terms of no rate hikes (albeit CRR hike seems to be a foregone conclusion due to excessive liquidity).
If & when the Rate hikes happen, the most impacted segment is going to be the extreme short end of less than one year segment. 3,5 & 10 year segment (though may inch up marginally on these announcements based on sentiments), should not be impacted too much as the said segment has already priced in these negative news.
The current short to medium term yield curve will give ample opportunity to the Fund Managers to create duration of between 2-2.5 years with much higher accruals & with the roll down strategy. Currently 6 month asset is available between 4.75-4.85%. 3 months down the line the same asset will be 3 months accruing the same 5% levels. Currently 3 month assets are quoting between 3.80% to 4% levels; hence the same asset ( with residual maturity of 3 months) will still earn 5% on accrual basis & hence having enough cushion in case of any rate hikes.
Current Yields in various segments:
|
CD
|
CP
|
Corporate Bonds
|
|
|
1 day
|
3.15-3.20%
|
||
|
3 months
|
3.80%
|
4%
|
|
|
6 months
|
4.75-4.85%
|
5.10%
|
|
|
12 months
|
5.75-5.90%
|
6.10-6.20%
|
|
|
3 years
|
7.60-7.70%
|
||
|
5 years
|
8.30 -8.40%
|
With at least a six month investment horizon (getting into next Fiscal Year), current yields with ample systemic liquidity & lower credit offtake ( with easy credit season kicking off from April 2010 onwards) will be an ideal situation to invest in this asset class of Short Term Plans with higher accrual/higher duration strategy.
RELAUNCH OF AIG SHORT TERM PLAN:
AIG Short Term Plan is planning to relaunch their existing scheme with this strategy in mind. They aim to generate higher accruals & capital gains over six month horizon with following portfolio creation strategy:
Their portfolio break up would be as follows:
40% < one year papers
30% 3 year papers
30% 5 year papers
Creating an average maturity closer to 2.3 years with gross yield closer to 7%.
I believe this product & asset class is the need of the hour & would strongly recommend you to invest in the same with at least 6 months view. Though currently there is an exit load of only 0.25% for exit within 15 days, the same is likely to be increased to maybe 3-6 months exit load in the near future. This is to safeguard any volatility due to pre mature withdrawals & help Fund Manager to execute their strategy in smooth & efficient manner.
Another advantage of investing in AIG Short Term Plan is that they are sitting on a very low corpus of Rs.25 crs; hence they will start creating this scheme as more akin to an NFO launch & start on a clean slate without any past baggage in their portfolio. Other advantage of relaunching this scheme at current juncture is that they will be able to capture higher gross yield in their portfolio without sacrificing on the credit quality of the portfolio. Market is giving ample opportunity o Fund Managers to invest in high credit quality papers giving very decent gross yields.
Comments
In view of the steepness of the yield curve (1 to 10-year bond is near all-time high), is it still a good idea to invest in Short Term Fund or we wait for RBI Policy on 29th Jan’10.
Kindly advice.
Leave a Comment