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

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

Most of the times, Mutual Fund industry has come up with NFOs of  both Equities & Debt when either equity markets are on a run (say SENSEX at 20-21000 levels) or pushed debt market schemes when interest rates have been at rock bottom (say 10 year benchmark at say 5%). Typically markets take note of any asset class only after it has generated enough returns & that actually might be the time to exit those asset classes.

In my long career of 25 years, very rarely have I seen a debt market NFO/ or a sales push when interest rates are at their peak or when equity markets were down in the dumps at say  8000 Sensex in 2008.

Hence, it is a pleasant surprise when Pramerica Mutual Fund is coming out with their Ultra Bond Short Term Scheme when interest rates are at their peak (immediately after the last Policy review on September 16’2010 when RBI once again raised the benchmark rates).

Though this asset class does not have much volatility or much impact of interest rate hikes or reduction (as their duration post August 01’2010 SEBI guildelines of MTM) are on much lower side; one positive in favour of a new NFO is that it will capture very high accruals at the shorter end without taking any MTM calls or going beyond even 90 days in average maturity for their scheme. This scheme due to it’s sheer timing & starting with a clean slate during NFO is capable of outperforming other existing schemes by almost 25-30 bps.

Current Likely Attributes of the scheme: The Fund Manager hopes to create the following portfolio during the NFO Stage:

There have been hardly any redemptions in this month as compared to redemptions seen in September 2009 post the advance tax outflows. Hence, inspite of rate hikes on September 16 policy review, shorter end of the curve has marginally rallied (as against expectations of spike in short term rates). Market participants are expecting the tightness in the liquidity to continue for some more time & are expecting short term rates to go up in first week of October. This will enable the Fund Manager to take a slightly longer duration call of investing even in 100 day CDs (which is yielding almost 30-40 bps higher than the 90 day CDs as the maturity of the said CDs is going beyond December 2010). Hence by even creating an average maturity profile of 90-95 days post the NFO &  without taking too much of MTM calls, the said scheme is capable of outperforming other existing ultra bond short term schemes by as much as 25 bps.

I would personally recommend investing in the said scheme both at the NFO stage as well post NFO stage.

As per the offer document, of the above, upto 30% of the portfolio will stay invested in less than one year maturities. Also, the Fund Manager has taken a tactical call of investing another 20% (out of the allocation earmarked in CP/CD as the same was giving higher carry than parking under CBLO) of the portfolio in medium term debt of 2-5 year segment post the Credit Policy Review tomorrow. If the RBI hikes benchmark rates, he will be able to capture that higher carry.

Inspite of the fact that only 50% of the portfolio is invested in corporate NCDs of 2-5 years, the said portfolio has captured a very decent yield of 6.29% with average maturity of close to 1.75 years. Post the policy, the Fund Manager hopes to increase the Average Maturity to 2 years with gross yield between 6.50% to 6.75%.

Current attributes:

RETURNS SINCE INCEPTION I.E. FROM JAN 20 TO JAN 27: 6.73% p.a.

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.