Mutual Funds

Franklin India Corporate Bond Opportunities: BUY

Radhika Merwin | Updated on November 25, 2017

It actively invests outside the triple-A rated bonds to maximise yields



If the ups and downs in interest rates have you bewildered, you can opt for bond funds that try to maximise interest receipts rather than make gains from bond prices.

Franklin India Corporate Bond Opportunities is one such fund that invests in bonds with different ratings, betting on the credit risk of its holding to earn commensurately higher interest.

The fund has outperformed its category average and benchmark since inception. The fund particularly takes an active call in the instruments that it invests in with half of its assets parked in AA-rated bonds. The fund delivered 11.4 per cent returns in the last one year, outperforming its benchmark by 100 basis points.

Consistent performer

The Franklin India Corporate Bond Opportunities Fund has delivered 10.6 per cent annualised return since its inception in December 2011. This is superior to the 9-9.25 per cent offered by banks for one-three-year deposits (best rate at 9.3-9.4 per cent). Even during the sudden rise in short-term interest rates during July-August 2013, the fund managed to cap its loss at 1.9 per cent. It has recovered smartly since September last year and delivered 11 per cent.

The fund takes an active call on the credit ratings of bonds. The fund has invested half of their assets in AA-rated bonds, and close to a third of its portfolio in instruments rated A or lower. Hence, the yield to maturity (YTM) for the fund has been in the 10.7 to 12 per cent range — higher by 40 basis points on an average when compared with other similar funds in the category, such as Birla Sun Life Medium Term and Birla Sun Life Short Term Opportunities. The strategy of the fund is to keep the average maturity below three years. The fund’s average maturity has been between 2.5 and 2.7 years.

Go for higher returns

In the recent Budget, the Finance Minister plugged the tax arbitrage between debt funds and fixed deposits. Capital gains on all non-equity mutual funds held for less than three years are taxed at the slab rate, similar to bank deposits.

Also, the tax on long-term gains arising out of debt funds is now fixed at 20 per cent with indexation.

With the tax differentials gone, investors can still opt for open-ended debt funds, provided they deliver better returns than bank deposits.

The scheme invests in debentures rated A to AA+ of companies such as JSW Steel, Tata Sky, Century Textiles and IL&FS Transportation, among others.

Published on September 20, 2014

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