A Fixed Income Fund
Scheme Seeks To Reduce Interest Rate Volatility & Generate Returns By Investing In Fixed Income Securities
AFTER unprecedented gains in 2009, Indian equities still look promising, especially from a long-term perspective. However, with the government expected to tighten the monetary policy, fixed income investors, especially of long-dated paper, are likely to lose out.
At this juncture comes a scheme from Franklin Templeton AMC that seeks to reduce interest rate volatility and generate returns by investing in a mix of fixed income securities, which mature on or before the maturity of the scheme and equities.
Franklin Templeton Fixed Tenure Fund – Series XIII – Plan A, a three-year closed-ended scheme intends to invest 80-100% of its assets in fixed income instruments, which includes money market instruments. Up to 20% of the money can be invested into equities and equity-linked instruments. The scheme has a benchmark comprising 20% of the S&P CNX 500, 70% of Crisil composite bond fund index and 10% Crisil liquid fund index.
While interest rate volatility will be managed by the fund investing in fixed income instruments, returns will be generated by investment into a diversified equity portfolio. This augurs well for investors with a desire to have an equity icing on a wellmanaged portfolio of fixed income instruments. The scheme allows investors to participate in the upside associated with equities while letting them retain the safe domain of fixed income securities.
However, investors will do well to note that this is not a capital-protection scheme. In traditional fixed maturity plans, investors presume that there would be no loss as fund managers invest only in debt market instruments where maturities of different instruments are equal to, or less than the scheme maturity. In this product though, money managers may contain the risk of loss due to interest rates movement by choosing instruments that mature before the scheme matures; the equity component brings in a risk of loss with the opportunity to participate in the upside.
Also, the scheme being closed-ended, investors cannot redeem their units before the maturity date. However, the units of the scheme will be listed on the stock exchange and one may exit the scheme by selling the units on the bourse. Investors should note that this exit may be painful as there may not be enough buyers, leading to a distressed sale. If you pre-empt an exit before maturity, you have to buy the shares in a dematerialised form, for which you need a demat account.
The units will be allotted on February 4, 2010 and the scheme will mature on February 3, 2013. The fund offers the investors two options — growth and dividend. The minimum amount of investment is Rs 10,000. There is no entry and exit loads.
Why Invest:
To earn healthy risk-adjusted returns by investing into a portfolio of both fixed income instruments and equities.
Why Not Invest:
q Being a fixed income dominated scheme, post tax returns will be lower than the combination of a debt and equity scheme.
q Closed-ended structure reduces the probability of pre-maturity exit at NAV since the only exit is through the stock exchange.
