The Franklin Templeton episode, which saw the winding up of six of its debt funds, has flustered investors. With money in these funds locked in for at least the next 2-3 years, investors have turned wary of parking money in debt mutual funds altogether.
While the apprehension and anxiety is understandable, it is important not to paint all debt funds with the same brush. There are 16 categories of debt funds as laid down by SEBI.
The risks and returns across these categories vary vastly depending on the interest-rate and credit risks they carry.
For instance, while interest rate-risk is higher in long-duration gilt funds than in short- or low-duration debt funds (long-duration bonds are more sensitive to interest-rate movements), credit risk is higher in credit-risk funds as a category as they invest a minimum of 65 per cent in below highest-rated bonds.
On the other hand, corporate bond funds invest at least 80 per cent of their assets in highest-rated debt instruments and hence, carry relatively low risk.
Hence, conservative investors can consider corporate bond funds for a portion of their debt fund investments. Within this category, ICICI Prudential Corporate Bond Fund has been a steady performer. The fund carries four-star rating under BusinessLine Portfolio MF Star Track Ratings.
Over three- and five-year time horizons, the fund has delivered 8-8.4 per cent returns, about 80 bps higher than the category average. Investors with a two- to three-year horizon can invest in the fund.
Relatively low risk
The Franklin episode has brought to light the illiquidity issue in low-rated bonds, which has gotten accentuated amid the market turmoil. Hence, if you have a low risk appetite and are seeking liquidity and stability in returns, investing in funds that have high exposure to low-rated bonds can cost you dearly.
So, select your fund based on your risk appetite and after going through the fund’s portfolio disclosed every month by the fund house.
Corporate bond funds, given their inherent mandate of investing in high-rated bonds, are a good option for conservative investors. But even within these funds, investors should consider the portfolio of the scheme before investing.
Over the past two years, ICICI Prudential Corporate Bond has been investing over 90 per cent in government and AAA rated corporate bonds, on an average, which lowers the credit risk significantly. In volatile times such as the present, predominant exposure to highest-rated bonds lends comfort.
Currently, the fund holds 18 per cent of its assets (as on April 30) in government bonds and about 78 per cent in AAA rated corporate bonds.
The fund has only one bond rated AA+ in its portfolio, which is issued by Daimler Financial Services India; it constitutes about 0.6 per cent of the scheme’s assets currently.
The fund’s top holdings in AAA rated bonds include marquee names such as LIC Housing Finance (10.2 per cent of assets), Rural Electrification Corporation (8.4 per cent), Reliance Industries (7.29 per cent), HDFC (6.47 per cent) and Power Finance Corporation (4.3 per cent).
Steady performance
ICICI Prudential Corporate Bond Fund has maintained its average maturity between 1.5 and 3 years over the past three years.
The relatively short maturity helps cap interest-rate risk.
Given the gyration in bond yields and uncertainty over government borrowing this year, a relatively short duration can help limit the volatility in returns. The scheme currently has an average maturity of 3.37 years and an yield-to-maturity of 7.1 per cent, which is healthy given the falling interest rates and the fund’s predominant exposure to highest-rated bonds.