HDFC Floating Rate Income Fund Long-term: Invest

Fresh investments can be considered in HDFC Floating rate fund-Long Term (HDFC FRIF-LT) with a one year investment horizon. HDFC FRIF-LT is an open-ended income fund which invests in a mix of corporate and money market instruments, not necessarily with a floating interest rate.

The RBI, for the tenth time in the last one-and-a-half years, hiked its policy rates and there is a possibility of further hikes, thanks to the uncertainty regarding the movement of inflation. Until such time that the uncertainty prevails, the rates on short-term instruments may continue to be higher than the longer-term rates. Additionally, long-term bond funds do carry higher interest rate risk.

This makes a good case for investing in ultra short-term funds or floating rate funds. HDFC FRIF-LT has given a good 7.5 per cent return over the last one year as against 7.1 per cent return provided by the benchmark CRISIL Liquid Fund index.

Strategy : Investors in this fund need to have a one-year investment horizon for two reasons. One, we expect some clarity to emerge on inflation and interest rates over one year. Two, the fund (effective from June 24 2011) has revised its exit load to 2 per cent for exit within one year of holding the fund.

Given the single-digit return in this category, exit earlier than a year would be sub-optimal for investors. This fund is better suited than fixed deposits for the investors in higher tax brackets as the income on fixed deposit is taxed based on the slab rates, where as capital gains tax on this fund is flat at 10.3 per cent (without indexation).

Portfolio and performance : Sharp rise in rates of money-market rates over the last one year have aided the performance of many short term funds including HDFC FRIF-LT. However, the fund has managed superior returns even over the longer term. Over a 3-year and 5-year periods it delivered an 8 per cent and 7.9 per cent annualised returns respectively.

During the same periods, category average of ultra short-term funds was 6.47 per cent and 7 per cent respectively. There is also consistency in the fund's performance as it outperformed its benchmark more than 85 per cent of the time on a one-year rolling return basis, considering the NAVs of the last five years.

This level of consistency separates HDFC FRIF-LT from other funds which have turned in a good return over one year.

HDFC FRIF-LT has never given a negative return over a one-year period, unlike a few long-term bond funds. It has also contained downside better than its benchmark. Even during 2010, when the rates were at the rock-bottom it delivered a 4.9 per cent return. The current portfolio is fully invested in certificates of deposits of banks. HDFC FRIF-LT has been actively managing its portfolio and taking advantage of the flexibility to invest in debentures as well.

The current certificate of deposit rates for one year are close to 9.7 per cent while commercial paper rates are in excess of 10 per cent, even after the rates have fallen marginally. The first half of the fiscal has lower financing activities, as we approach the second half of the year, the rates may trend higher given the credit demand and higher borrowing costs.

COMMENT NOW