DEBT FUND ANALYSIS

DEBT FUND ANALYSIS

Jun 16, 2008 – Jun 30, 2008

DEBT FUND ANALYSIS

Debt Market OutlookDebt Market Update

Debt Portfolio Strategy

Liquid Plus Funds are still a safer bet from a short term (3-6 months) horizon

Fixed Maturity Plans to offer better returns as the

short term rates to yield higher

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Market movements

Liquidity was tight and to make the situation worse, the RBI hiked the repo rate by 25bps

RBI increased the repo rate from 7.75% to 8%; the daily limit for open market operation in oil bonds

was also raised from INR 1,000 crores to INR 1,500 crores

Annual inflation for the week ended May 31 is

8.75%. This is higher than the previous week’s number of 8.24%

Inflation has reached the seven-year high; it was at 8.77% on February 10, 2001.

Liquidity/borrowings:

Liquidity was tight and the average money borrowed during the week from the repo window was INR 12,000 crores

Tight liquidity also pushed up the weighted average O/N money market rates to 7.68%, compared to the previous week’s 5.96%

G-Secs, non-SLR, and OIS yields headed north. One-

year OIS moved up by 45bps, one-month CD rates have increased by 70bps, and one-year CD’s have gone up by 23bps

It has been observed that in reporting weeks

liquidity is ample. Considering the current scenario, liquidity is expected to be sufficient. This can result in some buying in G-Secs

Two factors that will influence bond market direction are:

Dollar movement: Any inflationary number or comment in the US is expected to result in dollar appreciation, which can push INR/USD close to the

43-level. The RBI will have to intervene to sell the dollar, thus tightening liquidity

Ease in crude prices: This will provide some relief and push up bond

DEBT FUND ANALYSIS

Recommended Debt MF Categories

Liquid Plus Funds:

These funds have favorable portfolio composition. These funds are expected to invest close to 40% on higher side and 25% on the lower side in Corporate Bonds with maturity above 1 year

These funds are able to take advantage of rise in Overnight rates and also increase the portfolio yield by taking call in high duration bonds. In the current scenario where overnight rates are expected to remain high and yields on corporate bond to ease slightly from current levels. These funds are better positioned to take advantage of both the scenarios

These funds provide an indirect bet on Short to Medium term bonds. In case of 100% investment in these bonds an investor can be subject to mark to market compulsion and any rise in rates is likely to hurt the return on investment. However, with investment in Liquid Plus Funds an investor can take advantage of spread investment strategy of these funds

These funds are treated as an income fund and are exempt from the rise in Dividend Distribution Tax. Old rate of Dividend Distribution Tax is applicable to these funds

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Recommended Schemes in Liquid Plus Funds

Liquid Plus Funds – Retail & Institutional

DWS Money Plus Fund

ICICI Prudential Flexible Income Plan

LIC Liquid Plus Fund

Reliance Liquid Plus Fund

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DEBT FUND ANALYSIS

Recommended Debt MF Categories

Fixed Maturity Plans:

Product with various maturities

FMPs are available with numerous maturity options –1 month, 3 months, 6 months, 1 year, 3 years and 5 years. One can invest in the relevant plan depending upon his investment horizon and the requirement of cash flows on maturity

Minimal risk

Unlike debt funds, which are exposed to three kinds of risks viz. interest rate, credit and liquidity risk, FMPs are a better option

FMPs are least exposed to interest rate risk as the fund manager holds the instruments till maturity getting a fixed rate of return. Thus FMP can manage to get a specific interest on these instruments and investors have a fair idea about it. This helps investors tailor their investments as per their future cash requirements

They primarily invest in AAA, P1+ or such kind of good rated credit instruments with maturity profile of the securities in line with the maturity of the plan so there is also low credit risk with minimal liquidity risk involved

Tax Efficient Returns

FMPs yield competitive & tax efficient returns as the tax rates on a FMP are comparatively lesser than the tax rates in other debt funds

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DEBT FUND ANALYSISPlease find linked here the Edelweiss Fund Tracker file.Please find linked here the Edelweiss Fund Tracker file.Please find linked here the Edelweiss Fund Tracker file.

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DEBT FUND ANALYSIS

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Contact Details

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DEBT FUND ANALYSIS

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