DEBT FUND ANALYSIS

DEBT FUND ANALYSIS

Jun 01, 2008 – Jun 15, 2008

DEBT FUND ANALYSIS

Debt Market OutlookDebt Market Update

Debt Portfolio Strategy

Liquid Plus Funds are still a safer bet from a short

term (3-6 months) horizon

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Market movements

Liquidity was tight (because of a CRR hike and payout of INR 10,000 crore) pushing O/N money market and short term rates up

RBI raised the FII investment limit in the debt

market. Investment in the corporate debt market doubled to USD 3 bn, while limits in government

debt were raised from USD 3.2 bn to USD 5 bn

Annual inflation for the week ended May 17 is 8.10%. The last time we saw a number higher than this was on September 11, 2004, when WPI was

8.15%

Strong correlation was seen between crude price and bond yields, where any fall in crude price resulted in easing of bond yields

Liquidity/borrowings:

Liquidity was tight, pushing the money market rate to 7% plus levels

Average daily total liquidity was INR 88799 crore,

while the weighted average rate was 7.46%, much higher than the previous week’s 5.77%

Tight liquidity pushed non-SLR rates northwards. One month CD yields went up from previous Friday’s

7.60% to 8.65% today

Short-term rates will head north. In the current situation because of a lack of clarity on the direction

of yields, participants prefer the short end of the yield curve

Liquidity in June is expected to tighten further due

to advance tax and other outflows, we can expect more money to be raised in short maturities in CD’s and CP’s

It has been observed that bond yields have a high

correlation to crude prices. It will be one of the drivers; any fall in crude price can bring some relief rally to bond prices, but other than that, the market is in a negative sentiment after high inflation figure

DEBT FUND ANALYSIS

Recommended Debt MF Categories

Liquid Plus Funds:

These funds have favorable portfolio composition. These funds are expected to invest close to 40% on higher side and 25% on the lower side in Corporate Bonds with maturity above 1 year

These funds are able to take advantage of rise in Overnight rates and also increase the portfolio yield by taking call in high duration bonds. In the current scenario where overnight rates are expected to remain high and yields on corporate bond to ease slightly from current levels. These funds are better positioned to take advantage of both the scenarios

These funds provide an indirect bet on Short to Medium term bonds. In case of 100% investment in these bonds an investor can be subject to mark to market compulsion and any rise in rates is likely to hurt the return on investment. However, with investment in Liquid Plus Funds an investor can take advantage of spread investment strategy of these funds

These funds are treated as an income fund and are exempt from the current rise in Dividend Distribution Tax. Old rate of Dividend Distribution Tax is applicable to these funds

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DEBT FUND ANALYSIS

Recommended Schemes in Liquid Plus Funds

Liquid Plus Funds – Retail & Institutional

DWS Money Plus Fund

ICICI Prudential Flexible Income Plan

JM Money Manager Fund – Super Plus Plan

LIC Liquid Plus Fund

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