Rising Interest Rates Hurt

The turnaround in the performance of some the equity-oriented schemes of JM Financial Mutual Fund in recent months has not been replicated in the showing of its debt schemes.

Its long-term debt scheme, JM Income Fund, has been an underperformer in its category. The rather dull showing is largely owing to the nature of the debt market in the last few years, with hardening interest rates.

The one year returns and three year returns generated by the scheme, at 4.06 per cent and 3.94 per cent, respectively, lag the benchmark index (Crisil Composite Bond Fund index) by 1.5 per cent and 0.87 per cent, respectively.

As a result, the asset base of the scheme has shrunk considerably, and currently stands at Rs 43.28 crore. This is in contrast to the 2003-04 period, when it managed assets in excess of Rs 1,000 crore.

JM Income Fund is a veteran in the market (launched in December 1994) and was among the first three simultaneous launches when the JM Financial AMC started operations in 1994. It was called JM Liquid Fund then.

The scheme aims to provide high degree of liquidity while providing income and preserving capital.

The scheme has invested 69.85 per cent of its asset into debt instruments and 30.15 per cent in cash and equivalent. The debt portfolio is invested in good quality papers, with 31.65 per cent of net assets in AA/AA+ and equivalent papers and 38.19 per cent AAA/P+ or equivalent rated papers. The rest of the portfolio is maintained in CBLO instruments, which are highly liquid in nature.

The average maturity for the scheme has stood at 1.48 years, which is on the lower side for a long term debt product - but this is a trend across all income schemes. Fund mangers prefer to hold assets in near-cash instruments, ahead of the Reserve Bank policy review slated at the end of October.

For income oriented schemes, interest rate risk is high as these tend to invest in longer term papers. With the current outlook on interest rates is not very certain and investors would be advised to park funds in shorter maturity papers.