Debt is not dead: Top five MFs wade through crisis

The top five mutual funds in different categories of debt schemes have delivered compounded annual growth rates of 7 to 18 per cent in the last one year, despite the debt market crisis.

Recently, Franklin Templeton kicked off a fresh round of trouble by abruptly closing six of its debt schemes, leaving investors in the lurch.

However, the top five fund houses in each of the 10 different debt fund categories ― Corporate Bond, Short Duration, Banking and PSU, Credit Risk, Medium Duration, Dynamic Bond, Medium to Long Duration, Gilt, Long Duration and Gilt with 10-year Constant Duration ― have withstood the spate of turbulence in the bond market.

Due to the series of rates cuts by the RBI, long duration bond and gilt funds have topped the return chart for the one year ended May 6.

ICICI MF, the largest in the five debt categories ― dynamic, long term, medium to long duration, short, and medium duration ― has delivered CAGR of 10-15 per cent in the last one year.

HDFC Credit Risk fund with assets under management (AUM) of ₹14,450 crore has given return of 7 per cent, while Aditya Birla Corporate Bond fund has delivered 11 per cent return.

SBI Magnum Gilt and SBI Magnum Constant Maturity clocked 18 per cent and 17 per cent returns while Axis Banking and PSU Debt Fund gained 11 per cent.

Besides the troubled Franklin Templeton debt schemes, institutional and corporate sector-focused liquid and overnight categories of debt funds were not considered to gauge the health of debt funds.

S Naren, Executive Director and CIO, ICICI Prudential, said in a deflationary period, debt is the only asset class that can help investors in wealth creation, as it gets repriced when interest rates get lowered.

A falling interest rate scenario is beneficial to debt mutual funds because of the inverse relationship between yields and price of bonds. When there is a rate cut, the price of bonds goes up. This pushes up the net asset value or NAV of debt mutual fund schemes.

Only three top mutual funds in two debt categories ― credit risk and medium duration ― have delivered lower or negative returns.

In the credit risk category, Nippon India Mutual Fund’s return was down 9 per cent, while that of L&T Mutual Fund dipped -1.44 per cent. Adity Birla Mutual Fund clocked flat return of 0.66 per cent as on May 6.

Similarly, in the medium duration debt fund category, returns of Nippon India Strategic Debt Fund and Aditya Birla Medium Term Fund were down 26.6 per cent and 8 per cent respectively.

Corporate debt markets have been under stress since the IL&FS default in September 2018, and it was followed by a series of defaults by large corporates.

With the onset of Covid-19 and the resultant economic uncertainty, the situation has worsened further. Some of the debt schemes are in trouble due to the conflict between the investment objective and portfolio positioning.

Pankaj Pathak, Fund Manager (Fixed Income), Quantum Mutual Fund, said investors and many fund managers unfortunately ignored the liquidity and credit risk associated with the high-yielding, lower-quality private debt which has now returned to haunt the entire market.

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