Kothari Income Builder, an open-end debt fund seeks regular income under dividend plan and capital appreciation under growth plan. Normally, the fund can invest upto 100 per cent in debt instruments and upto 20 per cent each in money market instruments and shares.

The fund paid a dividend of 10 per cent on April 30, 1998 which translates into an effective annualised rate of 13.03 per cent for the initial investors.

Launched at a time when the interest rates had just started falling, the fund lost no time in deploying its funds.

Within a month, the fund was fully invested in high yielding corporate debentures of reasonable quality. The yield from Income Builder in July, 1997 was marginally over 18per cent. In the first six months since launch, the fund gained remarkably. At the close of December, 1997, the fund had already given a return of 9.5 per cent. This was mainly attributed by the interest rate cut in the busy season credit policy in October, 1997. The NAV shot up on account of appreciation in value of its assets subsequent to the rate cut.

On the other hand, the hike in CRR and bank rate in early, 1998 came as a blow to the fund. The NAV of the fund fell for the first time since inception. The fund has been relatively stable since then. In the past quarter, the fund has given an annualised return of 17.04 per cent and 13.76 per cent in its growth and dividend plans, respectively.

The fund has never been exposed to equities. The fund maintains over 90 per cent investment in debt under normal circumstances. In the past four months, the fund has substantially reduced its exposure to debt and resorted to money market instruments. Since April, the debt component has been brought down from 93per cent to 65 percent. Further, the fund manager is also realigning the debt portfolio in favour of short and medium term instruments. The average maturity period of the portfolio has been reduced from 3.23 years in February to 1.13 years now. This exercise should lessen the impact of any adverse movement in interest rates. The fund portfolio has a yield to maturity of 12.91 per cent.

The fund is invested predominantly in medium quality debt instruments. Nearly 20 per cent of total assets is deployed in AAA rated instruments and 7 per cent remains in unrated debt. The fund carries moderate credit risk. The fund derives most of its income from interest. The size of the fund is not large enough to absorb shocks. Kothari Income Builder is a no-load fund being sold and bought at NAV. The fund also offers 54EA and 54EB benefits.