Mutual Funds

Templeton Corporate Bond Opportunities Fund: A buy-and-hold debt fund

Aarati Krishnan | Updated on November 19, 2011

A retail investor-focussed debt fund appears to be a good option for investors today, given that corporate bond markets are offering such attractive yields.

Retail investors in India haven't taken in a big way to debt funds, as such funds have not generally served the purpose of being buy-and-hold products. Debt funds available today, segmented as short term, medium term and long term funds, require the investor to take an active call on interest rates. What is more, with a large proportion of corporate and high net worth investors in these funds, they suffer from substantial inflows and outflows that make them poor choices for retail investors.

Retail focussed fund

It is these two disadvantages that Franklin Templeton Mutual Fund tries to address with its new open end Templeton India Corporate Bond Opportunities Fund. The fund will limit its investments only to corporate debt securities with an average tenure of no more than 36 months. This will reduce interest rate risk on the portfolio, while allowing individuals to benefit from the prevailing high interest rates on corporate bonds. To make the fund specifically focussed on retail investors, it will levy an exit load in the 1-3 per cent range on any exit by investors within 30 months of purchasing units.

This high exit barrier, combined with a cap of Rs 5 crore per application per day, should help keep out big investors who may use this fund as a trading vehicle. The retail focus may benefit the fund in two ways. It may keep the fund's churn low and allow it to benefit from the attractive rates prevailing on medium term corporate bonds, without churning the portfolio too often.

Active strategy

The fund proposes to invest 65-100 per cent of its assets in corporate debt and money market instruments, with the remaining parked in treasury bills and CBLO markets.

The approximate current yields on corporate bonds and certificates of deposit/commercial paper are in the 8.5-11 per cent range. While the average portfolio maturity will be kept at 36 months or less at all times, the fund plans to take active calls on interest rates within this segment to benefit from interest rate moves as well as changes in corporate bond spreads.

To begin with, the fund plans to take higher exposures to corporate bonds in the 1-3 year segment, which offer high yields currently; this will buttress the fund's returns from interest income. If macro-economic conditions change, corporate spreads (difference between yields on corporate bonds and gilts) could compress over the medium term. Then, there could be capital appreciation from a rise in bond prices. The fund plans to leverage its own equity research team to identify companies with good credit quality .

Pros & Cons

Owning a retail investor-focussed debt fund appears to be a good option for investors today, given that corporate bond markets are offering such attractive yields.

With interest rates having gone up sharply in the last one year, there is limited risk of the fund's net asset value (NAV) taking a knock from a further rise in interest rates. The fund's 36-month tenure also limits such risks. The likely removal of double indexation benefits on fixed maturity plans in the new Direct Taxes Code also makes such open-end funds a good vehicle for debt investors.

The fund is not recommended for investors with short holding period of less than three years, given the high exit loads.

Published on November 19, 2011

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