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S. Vaidya Nathan

INVESTORS in the IDBI Principal Income Fund can stay invested, given its reasonably good track record, though the fund has been functioning for less than two years. Its tenure to date has been characterised by an extremely favourable environment for bond investments.

A series of cuts in interest rates led to a rise in bond /gilt prices (when interest rates fall, bond prices rise, and vice-versa). This helped debt funds deliver attractive returns, and IDBI Principal is no exception. It turned in returns of 17.54 per cent per annum under the Growth Option since launch in October 2000, after Principal, US, came in as a partner.

In the last year, the returns were 17.51 per cent and in the last three months 4.18 per cent. But it is in the next year or two that one will get a better idea of the quality of fund management. With interest rates close to bottoming out, there may not be as much favourable support from the external environment to push the fund performance forward.

This is true for all debt funds, but IDBI Principal Income Fund is still an unproven quantity across different market conditions. In this backdrop, existing investors can stay with the fund as there appears to be no immediate downside risk. Fresh investments can also be considered — but only small amounts now — as it would be better for a longer track record to emerge.

Suitability: IDBI Principal Income Fund is appropriate for investors wit a penchant for some risk, though it is a debt fund. Its short track record is a factor that enhances its risk profile compared to funds such as Sundaram Bond Saver, Birla Income Plus and Income Builder Account, to name a few.

Investors could consider the Growth Option on account of its superior tax efficiency in the wake of the recent changes in dividend taxation. This is especially suitable if you are in the higher tax brackets of 20 per cent and 30 per cent. If you want cash at regular intervals, pull out equivalent units that would fetch you the desired amount.

Portfolio overview: The fund has positioned its portfolio for a period of stable interest rates with some possibility of a modest cut in interest rates. The portfolio duration is 4.85 years.

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