In fact, the fund even managed to extract a small net profit from the deal as the interest earned on securities was marginally higher than the interest paid on the borrowing.

A fund of the size of Chola Triple Ace has to perform a tough balancing act since the small corpus makes it imperative to invest every single paise in securities that earn a higher return than cash or money market instruments.

On the other hand, it has to guard against sudden and heavy redemption. In the case of Chola, the redemption of Rs 3.3 crore was rather severe since the fund has had an average size of Rs 13 crore during its oneyear of existence.

Further, the fund manager had been following a policy of 100 per cent investment in debt instruments, which backfired with the sudden redemption pressure early this year. The fund has now changed tack and currently holds around 8 per cent in cash and money markets.

Chola Triple Ace borrowed the amount from Cholamandalam Investment and Finance company for a period of eight days at an interest of 17 per cent per annum, which translated into an outgo of Rs 99,000. On the other hand, the investments during the period earned an interest of Rs 1.1 lakh which resulted in a profit of Rs 11,000 for the fund.

Fortunately for Chola Triple, it had one or more instruments in its portfolio which earned interest of more than 17 per cent since the fund came into being at a time when interest rates were running high. Had the return on debt instruments been less than 17 per cent, the fund would have incurred a loss. And a loss is very much in the realms of possibility since a fund manager may notalways find a high-yielding debt instrument. Besides, the fund lost some high-yield instruments in the process.

Again, Chola's investments in only triple-A rated holdings clicked since these instruments are highly liquid and find immediate buyers. However, such an investment charter has also made Chola extremely volatile since any fluctuation in interest rates has an immediate impact on the fund's net asset value (NAV). For instance, the January 16 measures led to a 10 paise fall in NAV in one day and possibly, the redemption (unless the investor withdrew in anticipation of RBI measures).

With open-ended income funds allowed to borrow to meet redemptions, one could see more such disclosures in future although all open-ended income funds maintain some portion of their corpus in cash. In the event of borrowing, the fund managers have to ensure that losses in such a transaction are minimal and do not prove detrimental to the interests of existing unitholders.

On the positive side though, decisions likeChola's to borrow and pay investors will help enhance the asset management company's (AMC) credibility in the eyes of unitholders. But sudden and heavy redemptions are something fund managers will have to live with.