New investments can be considered in the units of Birla Sunlife Floating Rate Fund — Long-Term Plan (BSFRF LTP) with a one-year investment horizon.

The fund is ranked among the top performing floating-rate funds over three- and five-year periods. It has delivered compounded annual returns of 8.2 per cent and 7.8 per cent respectively over these periods.

The fund has outpaced its benchmark, CRISIL Liquid Fund Index, over three- and five-year time frames by close to 1.5 percentage points.

Inflation is expected to remain at these elevated levels for an extended period of time aided by the recent rupee depreciation.

This, coupled with the ongoing global crisis, is adding to the uncertainty on movement of near-term interest rates.

This has forced borrowers and lenders to bet on short-term instruments, which would mean higher rates at the shorter end of the maturity for some more time.

Therefore, it would be prudent to invest in funds which focus on shorter-tenor investments. BSFRF LTP is among the top performing funds in this category.

Strategy: While we have recommend BSFRF LTP with a one-year investment horizon, beyond one year, one may have to re-visit this investment based on the then prevailing rate of interest. The fund (as returns show) has performed well over the long-term investment horizon as well, which should give confidence to passive investors. The fund is suitable for investors in the higher tax bracket for investments beyond one year. Exit before a year would yield sub-optimal post-tax returns.

For investors in the 10 per cent tax bracket or below, fixed deposits may continue to be a better option.

Performance and portfolio: BSFRF LTP has given 8.5 per cent over a one-year holding period, better than the 7 per cent rate of interest that banks were offering on one-year deposits.

It has also bettered the category-average return (all floating rate and ultra-short-term funds) of 8 per cent.

For a six-month period, the fund return has been 9.35 per cent (annualised), which indicates that the returns are improving.

The current rates of one-year deposit rates of banks are 9-9.5 per cent. With the government expected to borrow more from the markets and hence, crowding out private borrowing, and the possibility of another rate hike, BSFRF LTP is better placed to improve its returns.

Two thirds of the portfolio, as of August 2011, was certificates of deposits, followed by 21.5 per cent investments in treasury bills.

The average maturity of the fund's holdings is 0.33 year while the yield-to-maturity is 8.78 per cent (annualised). This appears to be low given that the fund has taken relatively safe bets in its portfolio.

Another reason for the slight drag in portfolio return is high proportion of cash and current assets.

While cashallows space for betting in the call market, the rates in this market are relatively lower. The current call rates are 8.3 per cent.

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