Tata Banking & PSU Debt Fund NFO: For investors with a moderate risk appetite

Tata Banking & PSU Debt Fund is the new kid on the block. The new fund offer is open until October 3, and seeks to offer reasonable returns and minimise risk by investing in good-quality debt instruments.

At this juncture, given the uncertainty around various factors impacting bond yields, investors should go for short- and medium-duration debt funds that carry relatively lower risk. Banking and PSU debt funds, hence, are a good fit for investors with a moderate risk appetite.

Broad mandate

Within the short-term debt funds category, banking and PSU debt funds offer stable returns, a good play on rate movement on the shorter end of the yield curve and relatively lower credit risk.

They generate accrual income and capital appreciation by juggling various debt instruments. The portfolio mainly consists of certificate of deposits (CDs), commercial papers (CPs) and debentures issued by high-rated banks and public sector undertakings. To ride on rate movements (duration), these funds also switch in and out of G-Secs, within their relatively shorter duration of one to three years.

Performance track record

Over three- and five-year periods, these funds have delivered 7.8-8.5 per cent returns. Over the last one year, given the sharp fall in bond yields (yield and price are inversely related), the top-performing funds have raked in a tidy 12-13 per cent return. It is important to note here that these funds may not deliver mouth-watering double-digit returns in good years, like long-duration gilt funds do.

For instance, in 2014 and 2016, while gilt funds delivered 16-18 per cent returns, banking and PSU debt funds delivered 10-odd per cent returns owing to their lower duration.

In the lacklustre 2017 market, while gilt funds delivered about 2 per cent returns on an average, banking and PSU debt funds managed a higher 6 per cent.

There are 17 funds currently in this category. The difference in performance stems from their interest-rate calls (duration) and proportion of holdings across various debt instruments.

Hence, the track record of the fund manager’s performance is critical. Rather than opting for a new fund, going with funds that have a long track record is advisable.

Based on our Star Track Ratings , Axis Banking & PSU Debt (5 stars) and Kotak Banking and PSU Debt (4 stars) are the top-performing funds in the category, delivering 8-8.5 per cent returns over three- and five-year periods.

Bond view

While the RBI cut its policy repo rate by a notable 35 basis points in its August policy, Indian bond yields have only inched up, initially on expectations of a fiscal stimulus from the Centre, and more recently due to the FM’s move on corporate tax cut. From here on, yields can be range-bound around the current 6.6-6.8 per cent levels in the near term, until there is more clarity on foreign sovereign bond issuance, GST collections and disinvestment agenda. If the RBI cuts its repo rate in the October policy, it can cap the upside in bond yields.

 Given the uncertainty over bond yield movement, investors should opt for short- to medium-term funds to tide over the volatility. The fund will be managed by Amit Somani, and its performance will be benchmarked against the CRISIL Banking and PSU Debt Index.

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