For investors with a reasonably long-term investment horizon and who are looking at fixed income investment avenues, Reliance Income Fund is worth taking a look, especially in the current situation where interest rates are ruling high and there is a possibility of a downward correction in the medium term.
The yield to maturity of this fund is relatively high and in the event of a dip in interest rates, there could be the additional kicker in terms of capital appreciation of the portfolio.
Reliance Income Fund is a debt income fund with an overall asset allocation policy of 50 per cent to 100 per cent towards debt instruments and 0 to 50 per cent towards money market instruments.
At this point in time, the break-up is 98.40 per cent and 1.60 per cent respectively towards debt instruments and money market instruments. Since inception, the fund has given a return of 9.50 per cent.
Over the past five-year horizon, the fund posted a return of 6.50 per cent compared with the 5.22 per cent return of its benchmark index, the Crisil MIP Blended Index, while for the past one year the fund has given a return of 4.87 per cent against a 3.50 percent gain of the benchmark.
The point to note is that the YTM (Yield to maturity) of this fund is attractive at 9.22 per cent, while the weighted average maturity of the fund is also relatively high at 8.81 years.
A higher average maturity value signifies that the portfolio is highly interest rate sensitive. This could be beneficial when interest rates are high and therefore even a slight dip in rates can result in significant capital appreciation of the portfolio.
When there is a drop in interest rates, funds with a higher duration – a technical term which is correlated with higher average maturity - appreciate more than the low duration funds. On the flip side, the reverse is also true. In fact, if there is one more interest rate hike in the short term (which cannot be completely ruled out), the value of the portfolio of the fund would drop more than a fund with a lower duration.
Coming to the asset holdings, there has been a significant churning of the portfolio in the last one month. Investment towards money market instruments has now been pared from close to 8 per cent a month ago to 1.60 per cent.
While exposure to short-term certificate of deposits has been reduced from 10.78 per cent to 1.34 per cent, exposure to government securities has increased from 18 percent to 31 percent.
At present, this fund is heavily invested towards securitised debt 38 percent followed by government securities at 31 percent. The average maturity period of the fund rose sharply over the past one month from 5.58 years to 8.81 years. The corpus of the fund has come down from Rs 60 crore to Rs 50 crore in the past one month.
Coming to credit quality, as much as 59 per cent of the portfolio is invested in AAA bonds which are the highest category in terms of credit worthiness. When combined with the 31 per cent holding in sovereign securities (issued by the central government), one can safely say that the fund portfolio is invested in high credit quality instruments.
On the whole, it looks as if the fund manager has consciously decided to hike the interest rate sensitivity of the portfolio while maintaining a high yield to maturity value.
Since an attractive YTM can function as a safety net if the investor decides to hold on in the case of a still climbing interest rate scenario, this is an investment option open to those who might feel that the interest rate cycle has peaked or is near its peak and a reversal is on the cards.