Investments can be considered in the units of Birla Sun Life Monthly Income plan (BSL Monthly Income).

After underperforming in 2008, the fund made a smart recovery in the ensuing three years and outperformed its benchmark CRISIL MIP Blended index.

Its five-year compounded annual return of 8.7 per cent too was superior to its benchmark return of 6.9 per cent.

We had recommended a ‘hold' on this fund in January 2011. While the fund was showing signs of improvement in 2010, it was still lagging many peers. The picture has changed in the last one year, with the fund showing improved performance.

In 2011, the fund's performance improved significantly even as the equity markets corrected sharply during the period.

It is notable that the fund has a 15 per cent exposure to equities. The fund returned 3.4 per cent to investors as against the category average return of 0.34 per cent.

Suitability

It is noteworthy that BSL Monthly Income may not appear in the toppers' chart in the debt-oriented fund category. But the fund has a lower risk profile. The fund's three-year trailing sharpe ratio, which is a measure of the excess returns a fund can deliver over a risk-free asset (taken as a one-year treasury bill), suggests that it has delivered better than the category average for a unit of risk. Simply put, the fund is suitable for conservative investors who look for inflation-beating returns. With its marginal exposure to equities, it can offer better returns than fixed income instruments.

Risk profile

The fund sports a lower risk profile as a result of its investment strategy. For one, it only invests up to 15 per cent in equity. Other funds typically invest 20-25 per cent in equities, which increases their volatility.

Two, the fund's portfolio over the last two years suggests that it does not take exposure to risky debt instruments (rating of less than AA+) unlike most other funds.

Therefore, the historic returns may have lagged that of top performing funds. But over the next few quarters, risky debt instruments may underperform the AAA debt instruments until the business prospects of Indian companies revive.

The demand for debt papers with top credit quality will be high, driving the prices of such instruments.

Portfolio and performance

As of January 2012, the fund's equity exposure accounted for 12.5 per cent of the portfolio.

The equity exposure is well diversified, with the fund holding around 30 stocks in its portfolio.

While the fund has mostly adopted a buy-and hold strategy for its equity portfolio, the debt portfolio has been actively managed.

During the one year ended December 2011, the average duration (measure of interest rate risk) has varied significantly between 6 months and 5 years. On a rolling return basis, the fund has outperformed its benchmark 78 per cent of the time in last five years, suggesting consistency.

As interest rates are expected to fall in a quarter or two, the price of bonds in the medium-term maturities (3-5 years) can be expected to rise (yields are inversely proportional to prices).

This puts funds such as BSL Monthly Income, which focus on medium-term debt instruments, in a better position than funds that focus on longer-term bonds.

The fund can also perform better than money market instrument-focussed funds (which have returned well in the last year), when interest rates fall.

Investors should not confuse this fund with yet another scheme — Birla Sun Life MIP — from the same stable.

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