The Hindu Business Line : Sundaram Income Plus: Hold/Avoid fresh exposures

INVESTORS in Sundaram Income Plus can stay with the fund as the fund is yet to complete a year. Fresh investments, however, need not be considered as its performance has not been as anticipated.

Performance: Since July 2002, when the fund was launched, the NAV appreciated 6.69 per cent. In the same period, the NAV of Sundaram Bond Saver, the established income scheme, grew 8.19 per cent.

Income Plus was expected to outperform Bond Saver by investing in instruments whose rating was lower than AAA. In fact, the volatility in NAV, representing risk, of Income Plus has been lower than that of Bond Saver.

The lower returns and lower risk of Sundaram Income Plus is in complete contrast to expectations. Though the fund had invested a predominant portion in AA securities, the average maturity of the portfolio has consistently been lower than that of Sundaram Bond Saver.

Since long-dated securities outperformed shorter-term ones in the past few months, Bond Saver's performance was superior.

If interest rates do rise in the course of the next 12-18 months, Income Plus could outperform Bond Saver. However, factors that have shaped the performance of Income Plus suggest that returns of Bond Saver could be higher over a longer-term. This is because Sundaram Income Plus may hesitate to pick up longer-dated securities considering the risk involved in investing in lower rated securities.

Sundaram Bond Saver will continue to invest in longer-term top rated securities. The higher yield associated with lower rated securities may be neutralised by the lower yields associated with relatively shorter-term securities. This can perpetuate the difference in performance between Bond Saver and Income Plus.

Essentially, the challenge for the manager to achieve the objective of generating high yields. In this backdrop, fresh investments may not be advisable for investors seeking higher returns.

Suitability: The fund's focus on lower-rated securities enhances the credit risk involved. However, if its average portfolio maturity continues to remain low, the interest rate risk will be relatively lower.

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