Though interest rates have been reduced twice this year by the banking regulator, investors may still find it challenging to take duration calls while choosing suitable debt funds. In this regard, relatively low-risk corporate bond funds that invest almost entirely in securities with the highest credit rating may be suitable for most investors.
HDFC Corporate Bond (HDFC Bond) may be a good choice for investors with a modest risk appetite and a two to three-year horizon.
Though not a chart-topper, the scheme has delivered steady returns and stayed ahead of the category-average across time-frames. In the last five years, the fund has delivered a compounded annual return of 8.6 per cent, which was higher than what peers such as ICICI Pru Corporate Bond, Reliance Prime Debt and L&T Triple Ace Bond recorded.
By taking a medium-duration strategy to benefit from varied rate cycles and by investing in the safest of debt instruments, HDFC Bond reduces the risk quotient for investors. And yet, it has delivered 70-100 basis points more than the category average over the longer term.
Investors can buy units of the fund in small lump sums instead of taking the SIP (systematic investment plan) route. SIPs are generally not recommended for investing in debt funds.
Portfolio and strategy
More than 91 per cent of HDFC Bond’s portfolio is made up of debt instruments with the highest ratings — AAA and A1+. The fund invests in non-convertible debentures, zero-coupon bonds, commercial papers and certificates of deposits of corporates and financial institutions. The rest of the portfolio consists of government securities (6.6 per cent) and cash.
Some of the names that HDFC Bond has invested in include Reliance Industries, ONGC Petro, Reliance Jio Infocomm, LIC Housing Finance and NHAI. Early last year, the fund had over 18 per cent exposure to sovereign debt, which it trimmed subsequently as rates rose and fell.
Thus, the fund sports a portfolio that carries fairly modest risks.
Of course, by sticking to the best of debt issuers, the fund does lose out on better returns that may be possible in relatively lower-rated securities. But over the medium term of 2-3 years, the fund does deliver reasonably well, even though it may not be among the top few in its category.
In its earlier avatar — before SEBI’s mutual fund reclassification rules came into play — HDFC Bond was a medium-duration fund. It has somewhat continued on that strategy as far its duration of its portfolio is concerned. The scheme has generally maintained a modified duration of 2-3 years for its portfolio. This strategy has allowed the fund to ride out multiple interest-rate cycles smoothly.
Investors looking for a bit more than bank fixed deposits in terms of returns (more so on a post-tax basis) may especially find the fund suitable.