The Hindu Business Line : HDFC High Interest Fund: Invest

Gilt funds have been top performers over the past quarter, as a series of cuts in interest rates and lower inflation expectations triggered a spike in gilt prices. However, with the yield on the ten-year gilt already down to 5.7 per cent, there is uncertainty about whether gilts can continue to gain at the same pace in the coming months.

In this scenario, long term debt funds, which invest in a mix of corporate and government bonds, may offer better return potential to investors, albeit with some risk. While corporate bonds may offer good yield, gilts offer liquidity to the portfolio of these funds. In this category, HDFC High Interest Fund is one option that investors can consider.

Suitability: HDFC High Interest Fund, like other long term debt funds, is not a risk-free option and should be considered only by the more aggressive debt investors. The fund does carry interest rate risk and its NAV can fall if interest rates rise. As the fund invests in corporate bonds, the portfolio is also subject to credit and liquidity risks.

However, HDFC High Interest Fund’s focus on triple-A rated paper and the managers’ long track record suggest that it may be able to manage these risks well.

Portfolio: The fund’s latest (November) portfolio featured low credit risk with a 35 per cent sovereign exposure, a 58.6 per cent exposure to corporate credit and a cash position of 6.4 per cent.

The corporate debt exposure was mainly to bonds from Rural Electrification Corp, Power Finance Corp, IRFC, SBI and HDFC, all AAA rated. Only the 13.8 per cent holding in IDBI Bank was AA+ rated. While the fund hasn’t assumed too much risk on the credit aspect, given its long maturity profile, its NAV does stand exposed to interest rate risk.

Performance: HDFC High Interest Fund’s returns aren’t too impressive over a five-year period, at an annualised 5.9 per cent. That, however, captures performance in a rising interest rate cycle which isn’t conducive to debt funds. With interest rates beginning to fall over the past quarter, the recent surge in the fund’s NAV has lifted the fund’s three-year return to a respectable 8.7 per cent. Returns for the past quarter and one-year stand at 14.9 per cent (absolute) and 17.3 per cent, respectively. Between September and November, the fund has taken an aggressive bet on declining rates, which has paid off. The fund lengthened the average maturity profile of the portfolio from 6.6 to over 11 years. Though not a top performer among debt funds, HDFC High Interest is a top quartile performer and has beaten the returns on the CRISIL Composite Bond Fund Index by a sizeable margin.

With the reversal in the interest rate cycle already reflected in current bond prices, returns from this fund, going forward, will not be at the exceptionally high levels of the past three months. Thus, investors entering the fund now should moderate their expectations to 10 per cent levels for the next one year.

Having said this, with triple-A rated corporate bonds still trading at a spread of anywhere between 300 and 400 basis points over the sovereign yield, the corporate bond portfolio will deliver high yields.

A narrowing of the corporate bond spreads, if the funds crunch eases, may also bring in some price gains. A benign interest rate environment may also offer trading opportunities in gilts.

Facts: HDFC High Interest Fund managed an asset size of Rs 51 crore as of November. The fund levies an exit load of 0.5 per cent for redemptions made within six months, for investments of less than Rs 10 lakh. The fund is managed by Mr Anil Bamboli and Mr Shobit Mehrotra.

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