IDFC Super Saver Income Fund-Medium Term Plan: Invest

Investments can be considered in the units of IDFC Super Saver Income Fund -Medium Term Plan (IDFC Super Saver).

The fund has emerged as the top performer in the income fund category (for retail investors) over the last three years.

The fund returned an annualised 9.1 per cent and 8.9 per cent over the three- and five-year periods, respectively.

The category average return of income funds was 6.28 per cent and 7.27 per cent during the same periods.

From being a middle-of-the-road performer between 2007 and 2009, IDFC Super Saver improved its performance significantly since then.

Strategy

The fund predominantly focuses on corporate bonds with short-to-medium term maturities and can hold a portfolio with an average maturity of up to four years.

Income funds make for a good investment option when interest rates are closer to their peak and are expected to decline.

Any fall in rate of interest would give investors capital gains in addition to interest payout.

Currently, due to tight liquidity, the interest rates at the shorter end of maturity are higher than the yields on maturities which are more than five years (lack of supply in the long-term could also be a reason for lower yields).

With rates expected to decline, the fall in short-term rates will be steeper than long-term rates (more than five years) this time around.

This is because short and medium-term rates have remained high for long now, as much of the demand has been in this space.

Therefore, when rates fall, the price rally in short-term instruments such as 1-3 year bonds can be higher than long-term instruments as well as the very short-term money-market instruments.

Even after such decline and the ensuing price rally, the yield in these instruments may continue to look attractive for those with a slightly longer investment horizon.

Investors can consider IDFC Super Saver for their debt portfolio without too much active management.

Portfolio and performance

The one-year return of the fund is 10.2 per cent as against urban consumer price inflation of 8.5 per cent.

The fund's benchmark Crisil Short-term Bond Fund index returned 8.65 per cent over this period.

IDFC Super Saver predominantly invests in high quality paper and top-rated securities. AA rated instruments account for a very small portion of the portfolio.

This reduces the risk of prices correcting if the spreads between top quality paper and lower-rated bonds widen. The liquidity of this portfolio is also high which could handle redemption while reducing impact cost.

The fund has a high portfolio turnover. While such active management by the fund manager may have worked historically, it may increase the portfolio risk as constant churning can also result in wrong calls.

But the fund appears to be compensating investors for the risk.

Its risk-adjusted return, measured through the sharpe ratio, is better than the median sharpe ratio of income funds.

Corporate debentures account for two-thirds of the January 2012 portfolio, followed by sovereign bonds.

In line with declining yields, IDFC Super Saver's average yield-to-maturity is down to 9.4 per cent from 9.8 per cent.

The January-end average maturity of the fund is 3.75 years.

The fund's average maturity ranged from 1.69 years to 3.8 years in 2011, indicating active management.

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