A bet on credit risks

After the recent monetary policy announcement, there are now hopes that the RBI would ease policy rates in the future.

While rates are expected to cool off (as inflation worries recede) in the next year or so, the yield on the 10-year G-Sec has been stuck in the 8.5-8.8 per cent range for a while now.

Instead of taking an interest rate risk by investing in long-term gilt funds, you can invest in bond funds that capitalise on interest receipts rather than gain from bond prices. These funds invest in bonds with lower credit ratings, thus increasing the yield on its portfolio.

Birla Sun Life Medium Term Plan is one such fund that invests across different rated corporate bonds offering higher yields.

The fund has outperformed its benchmark index consistently in the last three years. Investors with a 12-18-month investment horizon can consider investing in the fund. The fund has delivered 10.7 per cent annually over the past three years. It has also outperformed other funds within the same category.

In an accrual strategy, the fund manager looks for shorter-duration corporate bonds that deliver high yields. Birla Sun Life Medium Term Plan focuses on getting returns through high accrual of interest on the bonds in the fund’s portfolio. Thus, the fund manager takes a selective call on bonds issued by companies in the lower credit segment. This helps it generate better returns, by taking credit exposure instead of duration exposure.

Birla Sun Life Medium Term Plan invests mainly in corporate debt, which constitutes 90 per cent of the portfolio.

The fund has higher exposure to bonds rated below AA, to generate higher returns. It has parked 30.7 per cent of its assets in such bonds, another 30.3 per cent in AA rated instruments and 17 per cent in the highest AAA category. Currently, the YTM (yield to maturity) of the scheme is 10.98 per cent and the duration is 1.75 years. In comparison, the Birla Sun Life Short Term Opportunities Fund, which predominantly invests in AAA rated bonds, has a lower YTM of 10.1 per cent.

The fund has consistently beaten its benchmark across all rate cycles. It has performed consistently in both upward and downward rate cycles. Its record during March 2010 and October 2011 and from April 2012 to May 2013, when the scheme delivered close to 13 per cent returns, indicates its ability to deliver in varying rate environments. Even during 2013-14, amidst the volatility in interest rates and a 50-basis-point increase in key policy rates, the fund managed to deliver 10.4 per cent return.

Rohit Murarka has been managing the fund since 2013.

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