Active calls aid superior returns

The HDFC Monthly Income Plan – Long Term Plan (LTP), launched on December 26, 2003, is the largest fund among Monthly Income Plans (MIP), with assets of Rs 8,358 crore as of August 2010. This is higher than most of its peers in the category, which have assets under management (AUM) of less than Rs 1,000 crore. The fund is hybrid in nature, with a predominant investment in debt. It is designed to provide regular income to investors in the form of dividends.

The fund is ranked Crisil Fund Rank 1 (top 10 percentile of the peer set) over the last three quarters. It is managed by Shobhit Mehrotra (debt portfolio) and Prashant Jain (equity).

Investment style
MIPs are debt-oriented hybrid funds with a portion of the AUM being invested in equity and the rest in debt and money-market instruments. The investment style is classified as conservative or aggressive based on the weightage given to the equity component. This proportion can vary between zero per cent and 30 per cent. According to this classification, HDFC Monthly Income Plan-LTP’s risk profile is aggressive, since its allocation to equity is higher i.e. between 16 and 30 per cent.

The risk profile of the fund falls between a pure debt fund and a balanced fund (greater than 50 per cent allocation to equity). This is beneficial to investors looking for a small equity exposure but with stable returns on a monthly basis. The higher debt component seeks to provide the necessary stability in returns for the fund.

Performance
The fund has given CAGR (compounded annual growth rate) returns of almost 13 per cent since its inception in 2003. The performance over the last one year has been notable with the fund delivering close to 14 per cent returns vis-à-vis 7.8 per cent returns of the benchmark index (Crisil MIPEX) and 8.2 per cent returns by peers. In other time intervals, too, the fund delivered better returns vis-à-vis the benchmark index and peers (see chart).

Active duration calls
The fund manager actively varied the duration of its debt portfolio albeit conservatively in response to the interest rate trend. For instance, when yields started hardening in 2008, the fund reduced the average maturity of its debt portfolio to about two years in August. This ensured limited erosion of AUM during the credit-cum-liquidity crisis of 2008. Funds benefit by reducing the duration when yields harden and vice-versa.

The fund subsequently capitalised on the debt market rally (the benchmark 10-year yield dropped from around 9 per cent to below 5 per cent in January 2009) by increasing the average maturity of its portfolio to 6.16 years in January 2009. Further, the fund gradually reduced its average maturity (when interest rates hardened again from January 2009 till August) to settle around two years in August.

The disciplined portfolio management can also be inferred from the superior returns generated by the fund since its inception. If an investor had invested Rs 1,000 in the fund in December 2003 (at inception), the initial capital would have grown to Rs 2,284 vis-à-vis Rs 1,623 in the benchmark index.

Consistent dividend payouts
Over a five-year period, the fund has distributed dividends in 51 out of 60 months, indicating its consistency in terms of regular dividend payouts. The average dividend yield of the fund over this period is 0.62 per cent.

Portfolio analysis
HDFC Monthly Income Plan – LTP has had an average equity exposure of 24 per cent over the last three years. Over the said period, the fund has consistently maintained its equity exposure above 20 per cent. The fund varies its allocation dynamically between equity and debt based on the fund managers’ view on equity and interest rates.

The debt portfolio is well guarded in terms of the credit risk as a result of investing in the highest-rated debt papers and government securities. Over the past three years, 85 per cent of the fixed-income portfolio has been invested in such papers.

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