Mutual Funds

Axis Banking & PSU Debt: Healthy returns with low risks

Anand Kalyanaraman | Updated on July 27, 2019

Net outflows from debt funds soared to $25 billion in June   -  Bloomberg

The scheme’s investments have the highest ratings

Over the past many months, debt funds have got a lot of bad press. Defaults by many companies including IL&FS and DHFL led to several debt fund schemes taking a knock on their NAVs and investors losing significant money. It didn’t help that even some liquid funds — that were often projected as safe and positioned as a better alternative to bank deposits — also took losses in this fiasco.

Standstill agreements that some debt fund schemes entered into with a few troubled indebted companies also didn’t go down well with investors and the regulator. No surprise then that investor confidence has waned and debt funds as a whole have seen big outflows in recent times.

But even in this not-so-happy scenario, there are a few schemes that have done quite well. Axis Banking & PSU Debt, for instance, has delivered more than 10 per cent returns over the past year and annualised returns of about 8 per cent over three as well as five years. This is better than the performance of its benchmark, Nifty Banking & PSU Debt, and also the peer average — placing the fund among the best performers in the category.

Importantly, the healthy returns have not come at the cost of high risk. Banking and PSU debt funds, as a category, tend to have relatively low risk since they invest a major chunk of their money (at least 80 per cent) in debt instruments of banks and public sector entities, or companies in which the government is a major shareholder, directly or indirectly. The debt servicing and repayment track record of these entities, so far, has been good.


Strategy and portfolio

Axis Banking & PSU Debt has about 86 per cent of its corpus invested in debt instruments of PSU companies and banks as of June 2019. This portfolio includes debt instruments of NABARD, SIDBI, BPCL, PFC, NHAI, NTPC, REC, FCI, LIC Housing Finance, Exim Bank, Andhra Bank, Bank of Baroda and PNB.

Of the balance 14 per cent or so of the corpus, about 1.8 per cent is in bonds of State governments, about 3 per cent is in cash and equivalents, while the rest is in debt instruments of blue-chip private sector companies such as Reliance Industries, Tata Sons, Grasim Industries and L&T. A small portion is in the debt of Jamnagar Utilities & Power, owned by the promoters of Reliance Industries.

All the debt investments of the fund have the highest credit rating — AAA in the case of corporate bonds (more than 91 per cent of the portfolio), A1+ in the case of certificates of deposits, and sovereign ratings for State government bonds. This mitigates credit risk to a large extent, if not eliminated, given some exposure to debt of private sector companies.

The interest rate risk of the fund — possible fall in NAVs due to rise in market rates of interest — is also not high. This is reflected in the fund’s average maturity of 2.8 years, as per the June 2019 factsheet. A largely accrual-based strategy with a focus on high credit quality, liquidity and opportunities in the short-to-medium term corporate bond market (three to four years’ maturity) has held the fund in good stead.

Over the past three years, the average maturity of the fund’s portfolio has been less than 4 years. Also, over the past year or so, the fund has held instruments only with the highest credit ratings; prior to May 2018, there was 5 – 15 per cent allocation to AA-, AA and AA+ rated bonds. Unlike some of its peers, Axis Banking & PSU Debt Fund did not have exposure to troubled papers such as IL&FS and DHFL.

Published on July 27, 2019

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