Mutual Funds

ICICI Prudential All Seasons Bond: Healthy returns with moderate risks

Radhika Merwin | Updated on January 12, 2020 Published on January 11, 2020

The fund has delivered 10.4%, 6.9% and 8.8% returns over one-, three-, five-year periods

The real GDP growth estimate for the current fiscal, pegged at a 11-year low by the Central Statistics Office (CSO) recently, has lent little comfort to investors.

The sharp slowdown, implying weaker tax collections, would add to the Centre’s fiscal burden, implying a rocky road ahead for the Indian bond market.

A highly likely oversupply of government bonds in the last quarter of the fiscal, owing to higher central government borrowings, will weigh in on the bond market.

While the risk of the looming fiscal slippage and higher inflation would exert upward pressure on the yields, there could be ad hoc short-term rallies owing to RBI’s intervention (operation twist) and a possible rate cut in the latter part of the year.

While taking exposure to long-term gilt funds would be risky at this juncture (rates nearly bottoming out), betting on dynamic bond funds that invest across durations may be a good option. Dynamic bond funds essentially ride on rate movements and the fund manager alters the duration of the fund portfolio depending on the expectation of rate movements.

ICICI Prudential All Seasons Bond Fund is a consistent performer within the category and carries a five-star rating on BusinessLine Star Track Mutual Fund Ratings.

The fund has delivered 10.4 per cent, 6.9 per cent and 8.8 per cent returns over one-, three- and five-year periods, beating category returns by 2-2.5 percentage points.

Investors with a moderate risk appetite and a two- to three- year time horizon can invest in the fund.

For bond markets

The 10-year government bond yield had moved up sharply post the RBI policy in December (when it held rates contrary to expectations of a rate cut), by around 30 bps to 6.7-6.8 per cent levels. But it has come down slightly, thanks to RBI’s intervention.

In a bid to ease the interest rates on long-term government bonds, the RBI has been announcing simultaneous sale and purchase of government bonds (operation twist), using proceeds from the sale of short-term securities to buy long-term government debt papers.

The spread between 10-year G-Secs and two-year government securities — it had widened to 90-100 basis points — has come down sharply to 35 bps now (thanks to another special OMO (open-market operation) by the RBI last week).

But there are still upside risks to long-term bond yields that could hurt investors. Remember, bond prices and yields are inversely related and longer-duration bonds are more sensitive to interest rates.




The Centre’s fiscal deficit is already at 115 per cent of the budgeted figure (according to Controller General of Accounts as of November 2019).

The Centre had pegged its gross market borrowings at ₹7.1- lakh crore in the current fiscal (up from ₹5.71- lakh crore last year). A significant slip in fiscal deficit — as is widely expected — will lead to an increase in the supply of bonds in the last quarter of the fiscal.

With inflation on the rise and unlikely to abate in the near term, the RBI may go in for a long pause, despite growth compulsions. This will also cap the upside in bond prices.

Hence dynamic bond funds that have the flexibility to invest across duration are ideal at this juncture, for those wanting some piece-of-the-rate action. Given that the fund manager’s call is important — active increase (to cash in on rallies) or decrease (cap downside) in duration of the portfolio — investors should bet on funds with a long and consistent performance.

Category-beating returns

ICICI Prudential All Seasons Bond Fund has consistently delivered across rate cycles.

For instance, while the fund delivered strong returns of 16-19 per cent in the good years of 2014 and 2016, it managed to deliver a 6 per cent return in lacklustre 2018. In 2019, a good year for gilt funds, the fund also managed to cash in on the rally and deliver a 10 per cent return.

The scheme’s average maturity has been varying from 1.5 years to as high as 10 years over the past three years — the active management helping it deliver category-beating returns. The fund has mostly invested a chunk of its assets in G-Secs and high-rated (AA+ and above) bonds in the past. Recently, it has taken some exposure to AA rated bonds. These include well-known names such as TMF Holdings (a subsidiary of Tata Motors), Torrent Power and AU Small Finance Bank.

The fund still holds a large portion in G-Secs (35 per cent) and AAA rated bonds (20 per cent), which mitigate the credit risk. The scheme carries an average maturity of 6.4 years and a yield-to-maturity of 8.2 per cent.

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Published on January 11, 2020
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