MY RECOMMENDATIONS

I have been recommending various debt schemes from January onwards including investments in GILT schemes on a systematic basis. These schemes were recommended based on some long term strategies which were being followed by these AMCs & have worked successfully even in rising interest rate scenarios. During this period from January to November, RBI raised benchmark rates by 200 bps. Inspite of these hikes, schemes recommended by me have delivered excellent returns based on the strategies which were discussed in my various notes (please visit www.msjcapital.com for detailed notes correlating with dates mentioned below on all these recommended schemes & strategies).

 I wanted to analyse all my recommendations in light of rising interest rate scenario, rising inflation, etc & also figure out whether the Fund Managers’ stuck to their strategies during these difficult times faced by the debt markets. As can be seen from the returns below (point to point from the dates on which I recommended these schemes) both my beliefs in the Fund Managers’ and their strategies have worked out well and generated handsome returns for all my esteemed clients. I had also recommended investment in G Sec schemes thru SIP due to slowing economic parameters & with a belief that at some point in near future, RBI will shift focus from managing inflation to managing slowing economic growth & will offer an opportunity for making some trading profits. When I started recommending this strategy in July 2011, benchmark yield was 8.47% on July 29’2011. It touched a high of almost 9% on November 15’2011 and is currently quoting at 8.53%. Weekly SIP during this period generated following returns:

 

 

 

 

TEMPLETON INDIA CORPORATE BOND OPPORTUNITIES FUND – NFO

Franklin Templeton is one Fund House which has given solutions at every bucket of the yield curve. All that the investor needs to do is identify the investment horizon of their cash flow and plug it in with one of the schemes of Franklin Templeton keeping in mind their average maturities and exit load issues. Once the investor has done this exercise, the second step is to know the captured YTM of the respective scheme less the expense ratio and they would be reasonably certain of what returns they should expect post their investment horizon of say 3 Months/12 Months/18 Months, etc. If there are rate hikes in the intervening period, returns expectations should be adjusted for this (however still with positive bias on the portfolio returns scenario).

 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

PARTICIPATE IN EQUITY PERFORMANCE WITHOUT LOSING SLEEP

 

DISCLAIMER

Thank You

 

All India  - Fixed Income Category

All Amount – All India No 1

 

 

PROVIDING SOLUTIONS – AXIS MUTUAL FUND

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.