An Alternate Asset Class between Liquid Plus & Short Term Plans
As is the practice every year, there are rumours once again circulating that Government might increase Dividend Distribution Tax (DDT) on debt schemes (other than Liquid Schemes- which already attracts higher DDT of 28% v/s 22% in other debt schemes) in the current Budget to be announced in February 2010. Also, there is a fear of notification coming into effect from SEBI to Mark to Market every security with more than 90 days of maturity (currently only non Money Market Securities of more than 180 days needs to be MTM & rest can be on accrual basis).
Both the above will have negative impact on debt markets on two counts viz:
- Tax Arbitrage which was available between liquid & other debt schemes (including Liquid Plus) will vanish &
- Returns differential between liquid & liquid plus will also shrink as Liquid Plus with more than 140-160 days average will start getting volatile & hence can go negative on a day to day basis. To avoid this volatility, AMCs will have to reduce average maturity to closer to 90 days (say 100-110 days) & this in turn will impact the returns as well. Based on this, I would presume the returns differential which is currently almost 100 bps higher in Liquid Plus might come down to 25-50 bps
In such a scenario, an asset class which is emerging as an alternative to liquid plus schemes with 1-6 month investment horizon are those schemes which are lower in average maturity than Short Term Plans ,with higher accruals & lower MTMs. One such scheme which I had recommended on January 5’2010 was Kotak Bond Short Term Plan.
Another scheme which falls in the same category between Liquid Plus & Short Term Plan & with a very sound track record since 2002 is Templeton Floating Income Fund-Long Term-Institutional Plan. The said scheme with an exit load of 15 days can go upto 25-30% in MTM and has still managed to beat CRISIL Liquid Scheme benchmark on 15/30/90 day rolling returns without going negative on any single rolling return analysis.
This scheme is very well poised to plug the vacancy which might get created if any one of the above or both of the above rules become applicable in the near future viz. increase in DDT in debt schemes & /or notification to do MTM on papers with maturities higher than 90 days.
Other Scheme Attributes:
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Templeton Floating Rate Income Fund – Long Term Plan |
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(As on Thursday, December 31, 2009) |
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Fund Details |
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Average Maturity |
0.36 |
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YTM |
5.47% |
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Duration |
0.34 |
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Composition by Rating |
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A1+/A1+(SO)/AAA/AAA (IND) (SO)/AAA (SO)/AAA(SO)(IND)/F1+ (IND)/F1+(IND)SO/LAAA/LAAA (SO)/P1+/P1+(SO)/PR1+ |
87.27%
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AA (ind)/AA+/AA+(SO)/LAA/LAA- |
7.82% |
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NR |
4.53% |
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Composition by Assets |
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Corporate Debt |
13.56% |
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Pool PTC |
14.48% |
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Single Loan PTC |
3.50% |
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PSU/PFI Bonds |
0.57% |
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Money Market Instruments |
63.36% |
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Bank Deposit |
4.91% |
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Other Assets |
-0.38% |
15 Day Rolling Returns v/s Benchmark Liquid Fund CRISIL Index*:
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Min |
Max |
Avg |
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Period |
FTIT |
Crisil |
FTIT |
Crisil |
FTIT |
Crisil |
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2002 |
4.76 |
3.35 |
9.73 |
11.06 |
7.51 |
6.20 |
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2003 |
4.27 |
2.47 |
8.46 |
6.98 |
5.62 |
4.49 |
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2004 |
3.91 |
2.72 |
6.11 |
6.05 |
4.71 |
3.95 |
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2005 |
2.45 |
3.49 |
5.89 |
5.50 |
5.04 |
4.55 |
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2006 |
3.53 |
3.90 |
7.85 |
11.21 |
5.93 |
5.70 |
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2007 |
4.94 |
-0.74 |
12.76 |
17.14 |
7.99 |
7.27 |
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2008 |
6.11 |
4.12 |
12.85 |
15.20 |
8.36 |
8.01 |
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2009 |
3.52 |
2.22 |
13.83 |
12.60 |
6.78 |
4.94 |
*As per data given by Franklin Templeton Mutual Fund
Based on above figures and possibility of some regulatory changes as mentioned above, I would recommend investors to look to invest in the said scheme with at least one month plus investment horizon.
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