Baroda Pioneer : Earn consistent returns with little risk

ET Bureau Dec 17, 2009, 01.18am IST

Fixed income investors who seek consistent returns with minimum risk have an opportunity in the form of Baroda Pioneer. This is an open-ended debt fund that aims to earn returns by investing in paper of varying maturities issued by public sector undertakings (PSUs) in India.

The returns will be in the form of interest income with fund managers taking a call on the interest rate cycle and compression of credit spreads, or the difference in yields between varying securities.

The fund aims to invest at least 65% of the funds in debt instruments issued by public sector undertakings and public financial institutions (PFIs). The fund manager can, however, invest up to 35% of the assets in government paper and treasury bills. The scheme may invest up to 50% of its net assets in debt derivatives and up to 25% in securitised debt.

By focusing on high grade dent instruments issued by the government and state-owned companies operating in sectors such as capital goods, oil and gas, power, financial services, etc, the fund intends to bring down the credit risk. This will ensure return of capital in a world that teeters on the threshold of a recovery.

Also, Indian PSUs operate across industries such as oil & gas, capital goods, mining, power, financials, leading to a low sector concentration risk. Given the public ownership of these large companies, there is a low possibility of a compliance issue as the companies adhere to best accounting practices, leading to better transparency.

Most PSUs have shaken off their inefficiencies and their fundamentals have vastly improved. They are now well poised to create long-term growth for all the stakeholders involved.

All these positives of bonds also ensure that bonds remain on the investor's radar in worst of the times, offering ample liquidity in the events of crisis or liquidity crunch. An investor with limited appetite for risk but a desire to participate in wealth creation by PSUs can consider an investment here and emerge as a stakeholder in wealth creation in the long run.

However, a point to note is that the fund intends to invest in higher liquidity PSU bonds and actively trade in instruments of varying maturities, depending upon the interest rate scenario. In other words, the fund's efforts on the active trading front can generate alpha — returns in excess of market returns. However, a wrong call on the macro picture could jeopardise the returns offered by the fund.

The minimum investment amount is pegged at Rs 5,000. For an exit before three months from the date of allotment, one has to pay an exit load of 0.5%. The fund enjoys mfAAA credit rating from ICRA, denoting the highest credit quality rating assigned to a debt fund.