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With the RBI signalling a stable rate regime on sustained moderation in consumer price inflation, it is an opportune time to lock into a good medium-term debt fund. Public sector undertakings (PSUs) and bank stocks may not be favoured by equity investors now but debt fund houses are betting big on fixed income securities issued by banks and Government-owned companies. Reason: higher safety of principal.
Currently, six mutual fund houses offer dedicated banking and PSU debt funds, pioneered by Kotak Mutual Fund in 1999. These include ICICI Prudential, DWS Mutual Fund, JP Morgan India and DSP BlackRock.
Pros and cons
The latest to join this bandwagon is UTI Mutual Fund; its banking and PSU Debt was launched in January. The fund was re-opened for continuous subscription on February 7. It will invest in bonds and debentures and money market instruments such as commercial papers (CPs) and certificate of deposits (CDs) of banks and Government-owned enterprises. UTI Banking and PSU Debt seeks to play it safe by investing predominantly in debt securities which assure the highest safety.
It will mostly invest in debt securities rated AAA and money market instruments rated A1+.
This makes it suitable for risk-averse investors, who want to ensure safety and are content with moderate returns. The fund also endeavours to maintain its portfolio duration at 12-18 months, making it less susceptible to interest rate fluctuations. But on the flip side, the fund’s sector mandate may prevent it from seeking out the best debt opportunities in the market at any given time. Diversification is as important for debt funds as it is to equity oriented funds and the key constraint to having a ‘thematic’ debt fund is that it may take concentrated exposure to a few securities. In the process of pursuing safety, this fund may have to forego some returns too.
The performance of Kotak Banking and PSU Fund and ICICI Prudential Banking and PSU Fund, which have had track records of over a year, hasn’t stood out. The funds made gains of 9-10 per cent in 2013, higher than the 8-9 per cent in 2012. After underperforming their respective benchmarks in 2012, these funds have managed to better the benchmarks last year. UTI Banking and PSU Fund will be managed by Sudhir Agrawal.
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