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What’s your risk appetite?

Retirees with an appetite for risk may invest in this plan in anticipation of higher returns than from the Post Office Monthly Income Scheme

Written by Niti Kiran | Published: February 16, 2009 12:06 pm

Bharti AXA Regular Return Fund,a hybrid scheme,has been launched with the objective of generating regular income through investment in fixed-income securities. It also aims to generate capital appreciation by investing a portion of its corpus in equity- and equity-related instruments. Investors may opt for monthly,quarterly or annual dividends. The growth option is also available.

The fund

Asset allocation. The fund will invest up to 80-100 per cent of its corpus in money-market and debt securities,and 0-20 per cent in equity- and equity-related securities (including derivatives like options and futures of equities and indices). However,initially the fund will invest 100 per cent in fixed income.

Portfolio construction

Debt. The average maturity of the fixed-income portfolio will initially be less than five years. “Average maturity will be actively managed depending on market opportunities,” says Sujoy Kumar Das,head-fixed income. Usually,debt fund managers go for higher average maturity in a falling interest-rate scenario,and lower average maturity in a rising rate scenario.

Equity. The maximum allocation to equity can be up to 20 per cent. According to Prateek Agarwal,head-equity investments,“We will invest in equities according to our market perceptions,sentiments and valuations. Valuations are already attractive,only sentiments need to improve. The measures of sentiments could be flow of institutional money into equity markets,and predictions regarding corporate earnings and economic data.”

The fund will be benchmarked against the CRISIL MIP Blended Index.

Risk,return and liquidity

This fund will be subject to interest-rate,credit,and liquidity risk,in addition to the volatility associated with equities (for a small part of its portfolio).

Risk. This fund will be sensitive to interest-rate movements. “If the rate cycle turns,the net asset value (NAV) of the fund will go down significantly,” says Veer Sardesai,a Pune-based financial planner. The fund has the mandate to invest in derivative instruments as well. According to Prasunjit Mukherjee,a Kolkata-based mutual fund analyst,“Monthly income plans are basically conservative products,so exposure to derivative will add to the risk of this fund.”

In the near future,with interest rates expected to ease,the fund is expected to do well. Says Das: “We are positive on interest rates for the next four to six months. Yields are expected to trend lower due to easy liquidity conditions,softer stance by Reserve Bank of India (RBI),low inflation,and slowdown in credit growth.” As for credit risk,the fund manager hopes to curtail this by investing in investment-grade papers. “The fund will not go below 80 per cent in AAA assets,” he adds.

Tax and returns. The dividends are tax free in the hands of the investor. Under the growth option,if you hold the scheme for more than a year,a long-term capital gains tax (LTCG) of 10 per cent (without indexation) is applicable. As for returns,keep your expectations in check. “The chances of this category of funds giving above-average returns is quite low due to the unpredictability of debt combined with the unpredictability of equity,” says Mukherjee.

Cost. The maximum expense ratio has been estimated at around 2.25 per cent (for the regular plan). According to the fund manager,actual expense ratio could be lower as corpus size rises.

Liquidity. No exit load will be applicable a year after the date of allotment.

Other options

Other options available to people who need a regular income include fixed deposits (by using FDs of different tenures you can earn a regular income) and post office monthly income schemes (POMIS).

Fixed Deposits: If you are in the lowest tax bracket,opt for bank FDs,which currently give a return of 8-9 per cent for more than two years. FDs carry low default risk. As for liquidity,premature withdrawal is allowed (although,in some cases,penalty is charged at 1 per cent,i.e.,the interest paid is 1 per cent less than what you are entitled to for the tenure for which you maintained the deposit). The interest income earned is taxable at the marginal rate applicable to the individual.

Post Office Monthly Income Scheme: It pays an annual interest rate of 8 per cent. On maturity a 5 per cent bonus is payable. The maturity period is six years. If you close the account prematurely after one year but before three years,the interest payable gets reduced by 2 per cent. And if you withdraw after three years,the interest payable gets reduced by 1 per cent. The interest income is taxable at the marginal tax rate.

Should you invest?

According to Mukherjee,“The retired may allocate up to 25 per cent of their portfolio to such funds.” For those in higher tax brackets,tax wise this plan scores over a POMIS. Be warned that performance could be affected when the rate cycle turns. Would retirees want to court such risk,or would they prefer the certain returns from a POMIS? Due to presence of equities,its long-term returns could beat a POMIS. However,the risk of this plan is also higher.

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