Most of the Debt schemes of Templeton play on the following 3 stories (combination of any two or three of the stories):

1. High Accruals (or even low accruals if interest rates are on the lower side) & drawing down on maturities of this accrual
2. Roll down effect after (after 12 Months, 18 Months, paper becoming 6 Months paper & giving rise to capital gains if the yield curve is even slightly steep) &
3. Identifying sweet spots on the Yield Curve which offer maximum spreads and future compression possibility

However, TICBOF will play on one more stories besides the above 3: viz:

1. Bull steepening: going ahead TICBOF will play on one more story which is called Bull Steepening. Yields at the shorter end of the curve could come down more rapidly than the longer end, presenting a better opportunity of capital gains in 1-3 year corporate bond segment

Fund Manager feels that there is no scope for investment at the long end G Secs due to rising interest rate scenario and fear of higher fiscal deficit. Also, due to more demand by Insurance companies, FIIs, Banks, EPFO etc, very little spread will be available in the PSU bond segment.

However, due to following factors, spreads in AAA & AA rated Corporate Bonds in 1-3 years & 2-5 year segment are much higher and can in future give rise to capital gains due to the abovementioned impact of BULL STEEPENING:

• Higher Spreads in Corporate Bonds of almost 200-250 bps in 2-5 year segment
• Economic slowdown & lower credit off take to help in spread compression in this segment of the yield curve
• Fund Manager will be able to capture very high accruals between 10.50% to 11.00% p.a.
• Higher base PLR of banks will force corporates to borrow in the NCD market, giving ample opportunities to Fund Manager to select & choose
• Hopefully, inflation will come under control going forward &
• With that RBI will concentrate on growth & not inflation going forward by infusing liquidity in the system

Hence, with debt market story panning out as envisaged (peaking of interest rates, lower inflation numbers going forward, lower economic growth & lower credit offtake, etc) will augur well for investing in this segment of 2-5 year corporate bonds and earn very healthy double digit figure returns over next 3 years.

I would strongly recommend to invest in the said scheme NFO with 30-36 month investment horizon as there will be exit load in place for redemptions before 30 months as follows:

• 3% if redeemed within 12 Months of allotment
• 2% if redeemed after 12 Months but within 24 Months of date of allotment
• 1% if redeemed after 24 Months but within 30 Months from date of allotment

At the time of launch of their first NFO, AXIS MF had promised that besides the normal vanilla products, they will come out with schemes which will provide solutions to the investors and ensure that they participate in the right asset class at the right time.

Towards fulfilling that promise, one of the schemes they launched last year was AXIS TRIPLE ADVANTAGE SCHEME:

Build wealth no matter what is happening in the economy

There are obviously no guarantees but you can maximise your chances of making money by investing in a diverse range of assets. By balancing your investments across multiple asset classes you tend to reduce risk of losing money to economic shocks (like the recent global financial crisis). Empirical studies have shown that between 1995 and 2010, if you had invested equally in stocks, bonds and gold, only once would you have lost money i.e. in 1995.

Axis Triple Advantage Fund helps you take advantage of diversification by investing in a mix of equity, fixed income and gold in the following proportions.

• Equity and Equity related instruments            :               30-40%
• Debt and Money Market Instruments               :               30-40%
• Gold Exchange Traded Funds                               :               20-30%

This not only helps avoid monetary surprises but also provides opportunity for wealth growth. With Axis Triple Advantage Fund, if you have planned for something, chances are you should be able to get it.

By launching this scheme, they have fulfilled their promise of optimising returns from all the 3 asset classes as is evident from their last one year performance which was 9.3% p.a. as on August 23’2011. This scheme has outperformed all the following asset classes launched over last one year (as on August 23’2011):

• Outperformed the best one year FMP launched in August 2010 (7.6%)
• Outperformed the Crisil MIP Blended Fund Index over last 1 year (3.3%)
• Outperformed the best FD rates of SBI (6.8%)
• Outperformed the Crisil Composite Bond Fund Index (5.9%)
• Outperformed the S&P CNX Nifty (-10.7%)

Going forward as well this scheme & all the 3 a021sset classes will do very well due to following factors:

• Gold is likely to do well due to current US and Euro Zone market turmoil’s,
• Interest rates are peaking off and likely to cool off in next 3-6 months time & hence ideal time to invest with high accruals and capital gains possibility &
• Indian equity markets have already  taken a huge beating based on both domestic & global factors, giving good opportunities to Fund Managers in the equity markets

AXIS HYBRID SCHEME:

This is one more innovative idea from the stable of AXIS MF towards fulfilling their promise of providing solutions to the investor thru asset allocation strategy.

It is a 3 year close ended scheme with 81% allocation to debt securities on lines with 3 year FMP. With current interest rate scenario, Rs.81 invested in debt will become Rs.104-Rs.105 by the end of 3 years; thereby protecting the principal sum.

19% will be used to buy 3 years NIFTY CALL OPTION.

The advantage of investing in exchange traded options is that they restrict the maximum loss from equity to the premium paid for the purchase of the option. The hybrid fund is advantageous as it is able to recover all or part of the cost of the premium from the coupon received from the fixed income allocation. This strategy allows the portfolio to participate in equity upside while limiting downside risk.

By paying Rs.19 as premium, the scheme can participate to the extent of 90-95% in equity (unlike schemes which invest 80% in debt & 20% in direct equity & can only participate to the extent of 20% for any equity upside).

Assuming NIFTY remains at the same level or lower over the next 3 years, the scheme will not exercise the option & hence the investor loses the entire Rs.19 paid as premium. However, due to the debt scenario as explained above, the investors will get their principal back with some upside.

On the other hand , if say NIFTY goes up by 50% over the next 3 years, same will be reflected in the performance of the scheme as this 50% upside will be on 90% of the portfolio; thereby generating returns both from debt & by participating in the upside of equity to the extent of 90-95% of the portfolio.

Hence, an investor should consider this as an alternative to Equity allocation & not carve out of debt allocation. With current low equity markets, there is all likelihood of generating decent returns over next 3 years by participating in equity upside thru the call option strategy without risking the principal amount.

They have already launched 2 series of this scheme & their 3^rd series NFO is open for subscription till September 30’2011.

FIXED MATURITY PLANS v/s PRAMERICA TREASURY ADVANTAGE FUND (Pramerica TAF):

• During 2008 global meltdown & its implications on the Indian markets, a lot of investors panicked and even got out of one year FMPs at a loss
• However, that window of liquidity has been plugged by the regulators by giving no exit options to investors during the tenor of the FMP. This makes one year FMPs illiquid
• Also, the regulator has banned from giving out indicative returns & portfolios to investors of these FMPs; making it less transparent
• As against the above, Pramerica TAF is an open ended fund with daily NAV & exit options with full disclosure of portfolio & captured YTM details etc
• This makes the product more flexible, with transparency of portfolio also giving details of captured yield, average maturity data etc available to the investor every month
• Hence, without losing on liquidity at the same time earning near FMP returns, the said product keeps the upper corridor open for expectation of much higher yield than one year FMPs (which can not participate in any capital gains arising out of either roll down effect or from falling interest rate scenario)
• Also, at the end of the tenor of FMPs, the investor does not have a choice but to accept funds back & take re investment risks
• As against that, since this scheme is open ended & only the recommended investment horizon is one year; in the absence of any alternate investment avenues post completion of one year; the investor has a choice of staying invested for some more time in the said scheme; thereby reducing reinvestment risks

I would therefore recommend investing in the said scheme with one year investment horizon & treat it like a quasi FMP with greater chances of participating on the upside both due to roll down effect as well as stable to slightly lower levels of interest rates one year hence.

Download : Pramerica Treasury Advantage Fund – Form

As mentioned in my yesterday’s note on J P Morgan Short Term Income Scheme, there is a near certainty of one more rate hike in March 17 Policy Review. Also, I had mentioned that how there is a huge premium (of almost 200 bps) on beyond March Papers quoting at above 9.50-9.75% v/s pre March papers quoting much lower at 7.50% levels. The Fund manager will try & capitalise on this differential.

Also, in my note dated January 12’2011 (CURRENT MARKET SCENARIO) I had mentioned that there will be at least 3.5 Lac Crs of CDs which will come into the market in this last quarter of January – March; putting huge upward pressure on short term rates.

Strategy of investment of the funds collected during the NFO would be to capture 90 day papers (going beyond March) between 9.50% to 10% levels & at an appropriate time (read March 2011) these papers (with residual maturity of less than 2 months) would be converted to 1- 2 year maturity papers creating an average maturity of upto 1.50 years at a very attractive net yield to the investor of anywhere between 9%-10% p.a.

As market participants rightly believe, we are in the last quartile of inflation peaking off; we are in the last quartile of interest rate hikes & hopefully the last quartile of very tight liquidity conditions. Any time during the next one year (post March); the Fund Manager will get ample opportunity of booking profits on very high accrual papers bought by them in March & also roll down effect kicking in or MTM capital gains reflecting in the NAVs.

I would recommend investment in the said NFO which is closing today or as & when it reopens with at least 6 – 12 month investment horizon. There is an exit load of 0.25% if exit made within 90 days of allotment.

Markets have started discounting rate hikes coupled with CRR hike. However, most of the bankers & Mr. C. Rangarajan (Economic Advisor to PM) are of the view that to curtail inflation, RBI needs to suck out excess liquidity through CRR hike rather than tampering with benchmark rates in the near future. They also predict that even if there is monetary tightening in the near future, it might not result in rate hikes by the banks (due to excess liquidity & lower credit offtake).

Any effort by RBI to curtail liquidity in the system is constantly getting offset by huge FOREX flows on account FII inflows. Almost $17 bln had been pumped during 2009; causing the local currency to rise by almost 10% from its low it touched in March 2009 of Rs.52/$.

Also, Q2 growth of GDP numbers was mainly fuelled by the Fiscal Stimulus provided by the Government. If one removes the impact of this stimulus on GDP numbers, actual growth would come down by almost 150-200 bps on the lower side. This fact will also not be lost on RBI as & when they think of raising interest rates to curb inflationary pressures.

As the data shows, inflationary pressures are more to do with failed monsoon & its impact on agricultural produce rather than the manufacturing sector. Hence, since the inflation is more attributed to supply side issues; this once again gives credence to no rate hikes in the January policy.

AXIS SHORT TERM PLAN NFO LAUNCH- A RIGHT PRODUCT AT THE RIGHT TIME:

Keeping in mind the above background of current & future scenario of debt markets & various expectations by different market participants it is once again a good time to take some interest rate calls & duration calls in your portfolio; especially in the 3-5 year corporate bond segment.

AXIS Mutual Fund is likely to launch in the month of January 2010 NFO of AXIS Short Term Plan. With the current status of debt markets & high liquidity with low credit offtake, the said NFO can be compared (in terms of timing) to launching an equity Fund at a SENSEX of say 10000. As one can’t go wrong by investing in such an NFO, I would assume that one can’t go wrong by investing in an NFO of Short Term Plan of AXIS Mutual Fund (with at least 6 month investment horizon) as most of the negative factors are already priced in with additional following reasons adding credence to the investment story:

Spreads between 1 year & 5 year corporate bonds are at an all time high. Before the hiking cycle started post October 2004, market had already priced in these hikes (which RBI delivered over a period of time). The spreads actually came down.

1-5 year Corporate Bond segment also is very steep & is likely to benefit due to :

As can be seen from above, timing of the NFO of AXIS Short Term Plan could not have been better. Even if there are rate hikes in the Credit Policy Review slated on January 29’2010; the Fund Manager will be in a position to capture the same while building the portfolio. The said NFO is likely to collect funds before the Credit policy Review & hence will help him start on a clean slate without any baggage of the past.

As is likely, the said scheme is likely to have an average maturity of 2-2.5 years & is likely to capture high gross yields (based on current market rates) of more than 6.5%. This will help the investors capture both high accruals & capital gains with at least 6 month investment horizon.

Investors in the NFO of AXIS Short Term Plan will have the added advantage of no exit load (if invested during NFO period). This is not say that the investor should exit before March 2010. I would personally advise clients to invest with at least six month investment horizon; however, if one sees decent returns in their portfolio post March 2010, one will be free to exit before six month period (if investment done during NFO) .

I would strongly advise you to look to invest in the said NFO with a view to earn decent returns over six month investment horizon.