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The Reserve Bank of India’s rate cuts that began in January are currently in pause mode. And the yields on long-term government bonds have hardened in the last two months.
Instead of taking an interest rate risk by investing in long-term gilt funds, investors can consider bond funds that follow an accrual strategy. Such funds focus on getting returns through accrual of interest on the bonds in the portfolio rather than gains from bond prices. Birla Sun Life Short-Term Opportunities Fund is one such that invests in low-rated corporate bonds offering higher yields.
The fund has consistently delivered above category returns across time periods. Its annual compounded average return of 10 per cent over the past five years is over one percentage point higher than the category average. Investors with a 12- to 18-month investment horizon can consider investing in the fund.
Birla Sun Life Short-Term Opportunities Fund looks for shorter duration corporate bonds that deliver high yields.
The fund mainly invests in corporate debt. It has invested about 40 per cent of its portfolio each in ‘AAA’-rated and ‘AA’-rated bonds in the last one year. Thus, the fund manager takes a selective call on bonds issued by companies in the lower credit segment.
As of June, ‘AAA’ bonds constitute 36 per cent of the fund’s holdings, while 45 per cent are in ‘AA’-rated bonds. Top ‘AAA’-rated bond holdings include Reliance Utilities & Power, Indiabulls Housing Finance, Rural Electrification Corporation, Reliance Jio Infocomm and Power Finance Corporation. Within the ‘AA’-rated bonds, its top holdings include Tata Motors Finance Solutions and Cholamandalam Investment & Finance.
Currently, the yield-to-maturity of the fund is 9.2 per cent and the duration is 2.47 years.
Steady returns The fund has delivered consistent returns across all rate cycles. It has performed in both up and down rate cycles – March 2010 to October 2011 (up) and April 2012 to May 2013 (down) – delivering close to 13 per cent returns.
The fund has delivered 10.4 per cent return in the last one year and about 5 per cent so far this year.
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