As you all are aware, though trading call was given based on movements in 10 year benchmark yields, it never gets fully priced in as most of the fund managers run different average maturities based on their assessment of the market & run average maturities ranging from 5-7 years. Hence, a trading call so far, was never fully implemented in true sense of the word due to different average maturities of these schemes.

However, as is the practice of AXIS MF, they have come out with a unique concept of CONSTANT MATURITY FUND which will replicate the maturity of the 10 year benchmark G sec by buying 9-11 years G Secs (including 10 year benchmark) & create an average maturity of as close to 10 years as possible. In this manner, any G sec trading/investment call can be executed thru this scheme rather than other schemes with varying maturities as explained above.

Now the question is whether timing of this NFO is correct or not & should one invest in the said scheme (when 10 year benchmark has already rallied from 9% levels to currently at 8.22% levels).

WHAT ARE THE POSITIVES GOING FORWARD FOR DEBT MARKETS:

1. There has been some inflows from FIIs; thereby rupee has appreciated currently from a low of Rs.54/$ touched in November/December to currently quoting Rs.51/$
2. Inflation numbers have gone below 8% mark for the first time in some time
3. Due to rising rupee, even imported inflation will come under control; thereby  reduce the inflation numbers going forward
4. Rupee depreciation added fuel to fire in inflation numbers which remained near 10% levels even in September as rupee depreciated between July to August 2011. Hopefully, reverse will be the trend going forward
5. RBI’s change of stance from only controlling inflation to focusing on growth
6. GDP figure will be dismal breaching even 7% or 6.5% number; thereby aiding RBI to start focusing on growth more aggressively
7. All these numbers will push RBI to come out with OMOs, CRR cut, Benchmark Rate cuts going foreword
8. Credit off take numbers way below RBI’s expectations is leaving liquidity in the hands of the banks to chase G secs
9. Inflation numbers will further ease off between January to March 2012 due to base effect & otherwise
10. During rate cut cycles, 10 year benchmark has gone below REPO Rate. This has happened twice in past decade:

• December 2000-November 2001-REPO Rate cut by 150 bps/10 year benchmark yield fell by 307 bps
• July 2008-December 2008-REPO Rate cut by 250 bps/10 year benchmark yield fell by 450 bps. In both instances, 10 year Benchmark Yield fell below REPO Rate

WHAT ARE THE NEGATIVES FOR THE DEBT MARKETS GOING FORWARD: (This will help in creating an average in G Secs investments going forward

1. Generally there is liquidity flow back into the country post December every year. However, March CD rates (quoting 9.50% in December & 10% in January) indicate otherwise
2. There might be disappointment in the market if RBI does not tinker with any rate cuts in January Policy Review; which will give rise to some correction in benchmark yields
3. Also, fiscal numbers in the Budget which will be announced in the month of March will be hugely disappointing
4. Also, auction calendar is yet to get over & is in fact on the higher side due to more borrowing programme announced recently

Assuming that soften by 50-100 bps over next one year, an investor can generate following returns (assuming the Fund Manager captures 8.50% yield during NFO stage by having combination of 9-11 years maturity papers):

TO CONCLUDE:

I recommend investment in the said NFO which is closing on January 19’2012. One should allocate 50% of the allotted amount in the NFO & balance 50% over weekly investment on every Thursday (a day prior to auction every Friday) from now to March 2012. This will help in creating an average once again between 8.20% to maybe 8.40% levels. Disinvestment can happen once RBI starts to act on the rate cut cycle (this will be a separate call which will be given by me at an appropriate time in the future). This should be treated as a trading call once again.

Yield trajectory going forward (with some corrections from now to March) is on the downward side only. Hence, with one year investment horizon & by creating an average as mentioned above, an investor can earn decent double digit figure returns.

DISCLAMIER

I have been recommending some of the debt schemes of Pramerica AMC since their inception. Fund Manager has performed very well even in the most trying periods of debt markets & rising interest rate scenarios. One of the schemes whose strategy is similar to that of Pramerica Treasury Advantage Fund (TAF) was launched in October 31’2011. The said scheme has a dual strategy of capturing high accrual 12 month papers & drawing down on their maturities & buying 15-18 month papers & capturing capital gains due to roll down effect. Besides that, as the name suggests viz. PRAMERICA CREDIT OPPORTUNITIES FUND, they would be having some play on some credit plays.

Most of the times credit opportunities denote that the Fund Manager would invest in lower quality papers and take some credit calls. However, it is not necessarily the case every time. In this case, the Fund Manager is likely to play on those credits which have upgrade possibilities (like one of their investments in Future Capital which was upgraded recently; giving rise to good capital gains) and such similar stories besides only taking credit calls. This helps the portfolio construct in two ways viz. 1) gives higher accrual at the time of investment & 2) gives rise to capital gains in case of upgrades & subsequent compression in yields of these papers.

I would strongly advise investment in the said scheme with such high YTM with one year investment horizon. I would also advise investment in all debt schemes of Pramerica AMC with following investment horizons:

• Following 3 year rolling return since January 03’2011 TO October 04’2011 which covers the worst period of equity markets (2008-2009) will prove how this strategy has not only protected the downside but generated positive returns over 3 years:

# as against returns of 7.52% earned in the scheme, SENSEX posted negative 3.33% over the same time horizon. Hence outperformance by almost 11%

• Current market PE as on September 30’2011 was 17.85 & hence allocation to Franklin India Bluechip is 60% & 40% is invested in Templeton India Income scheme

 CONCLUSION:

I WOULD RECOMMEND THIS SCHEME AS AN ALTERNATIVE STRATEGY TO INVESTING IN EQUITIES THRU SIP OR STP. IN THIS SCHEME AN INVESTOR CAN TAKE A CALL OF INVESTING A LUMP SUM AMOUNT (WHICH SO FAR I HAVE BEEN DISSUADING) & NOT LOSE SLEEP OVER TIMING THE MARKET

*Data Provided by Franklin Templeton MF. NAVs data from Franklin TempletonIndiawebsite & rolling return calculations done by Research Team at MSJ Capital

DISCLAIMER

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.

A similar story unfolded in an asset class called Monthly Income Plans (MIPs). When markets corrected from a high of 20827 SENSEX levels reached sometime on January 07’2008 to a low of 8325 reached on March 2’2009; then bounced back from these levels back to around 21,004 levels on November 01’2010, this asset class performed extremely well during this bounce back period. Based purely on returns figure in that year, most advisors started recommending this asset class sometime in November-December 2010 after seeing handsome returns in this asset class. This is evident from the industry corpus growth in MIPs.

Also, as one can logically conclude, MIP as an asset class would have taken a beating during the equity meltdown phase from January 2008 to March 2009; would have performed very well from March 2009 to November 2010 & the once again corrected from then to now.

However, I have been recommending investment in equities thru strategy of Systematic Transfer Plan from Liquid to Equity. If one would have done this even from the peak of January 2008 & continued the same thru the volatile period of March 2009, then once again peaking in November 2010 & once again thru the downturn, returns in the said strategy v/s one time investment in either equity or MIP from January 2008 till May 31’2011 would have looked as follows:

Hence, as can be seen from above, certain asset classes become flavour of the season or a year or so & go out of flavour without giving adequate warning to the investors. As against that, strategies like SIPs or STPs can be an ongoing strategy which can act as flavours for all seasons & can bring a) discipline in investing b) create an average during volatile times of the market & c) try & achieve decent returns for all times to come without investor trying to outguess the markets.

With current equity market conditions, I strongly recommend investors to try and invest thru this strategy of STP instead of trying to time the markets. Additional return in this strategy is also partly attributable to the fact that your principal amount gets invested in Liquid Schemes (currently generating 8-9% p.a.) & slowly & steadily gets replaced with equity assets over a period of time