Mutual Funds

CanRobeco Dynamic Bond Fund: Invest

Aarati Krishnan | Updated on March 10, 2018

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Tempted to invest in gilt funds after their mouth-watering returns in the last one year? Think again. While the rally in government securities may not be over yet, investing in gilt funds does carry risk if not timed well.

For investors who do not have the time or the ability to monitor interest rates closely, dynamic bond funds, where the fund manager switches between short- and long-term bonds to deliver a better return, are a good option. CanRobeco Dynamic Bond Fund, a relatively small fund in this category, may be a good buy for retail investors.

The fund has been steadily improving its performance in the last three years. Three-year returns, at 9.4 per cent, are just marginally higher than the category average for dynamic bond funds. But the one- and two-year returns, at 15.6 per cent and 13.2 per cent are significantly higher than category returns of 13.2 and 11.3 per cent, respectively. The fund has managed to move up from rank 7 (out of 15 funds in its category) a couple of years ago to rank 2 in the last six months.

As a tiny fund with less than Rs 10 crore in assets last year, CanRobeco Dynamic invested mainly in the 10-year g-sec and CBLO (collateralised borrowing and lending obligations) market, which meets short-term liquidity needs of banks, institutions and MFs. That limited returns.

Diversified portfolio

But an expansion in fund size in recent months has helped the fund pursue a more active strategy. It has increased exposure to long- term corporate bonds and gilts and diversified across 15 securities. This has probably aided returns. The end-April fact sheet reveals a diversified portfolio, with the fund size at Rs 77 crore. Over a third of it is invested in AAA or AA plus rated corporate bonds, 50 per cent in gilts and 12 per cent in commercial paper and deposits with only a marginal amount in CBLO. The g-secs carry a 10-15 year term.

With the RBI cutting interest rates by over 100 basis points in the last one year, owning long-dated g-secs has been a strategy that has paid off handsomely for funds. The yield on the benchmark 10-year gilt has dropped by 80 basis points to about 7.4 per cent in recent months. A further fall in this yield is now being expected, with cooling inflation offering leeway for the RBI to cut rates. This should extend the rally in gilt prices and prop up returns on the gilt portion of the portfolio.

At the same time, investing the entire portfolio in long-dated gilts does expose a fund to price risk, should further cuts in rates fail to materialise. Given this backdrop, CanRobeco Dynamic Bond Fund’s corporate bond exposures provide some cushion. If the gilt rally slows down, the higher interest rates available on the corporate debt should help make up overall returns. What is more, with a small Rs 77 crore asset size, the fund will be able to shift its portfolio between different maturities of debt or between gilts and corporate bonds much more quickly than its Rs 1,000 crore-plus peers.

The only flip side to this small size is a higher expense ratio (expenses fall with rising assets). The fund’s current expense ratio for the Regular option is 1.31 per cent. Investors can possibly reduce this burden by opting for the Direct Plan.

Published on June 01, 2013

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