ICICI Prudential Corporate Bond: Healthy returns with relatively low risk

Bond markets could be in for a volatile ride in the coming months. After cutting the policy repo rate by 135 bps this year, the RBI, in a surprise move, held rates in the recent December policy. Bond yields jolted upward and the 10-year G-Sec yield was up by about 30 bps until last week.

In a bid to ease interest rate on long-term government bonds, the RBI announced simultaneous sale and purchase of government bonds last week, using proceeds from the sale of short-term securities to buy long-term government debt papers.

While this led to a sudden fall in the 10-year G-Sec yield, growing concerns over rising inflation and fiscal slippage could keep bond yields volatile.

If you are a conservative investor wary of interest-rate risk and like to play safe with the credit risks of the underlying portfolio, schemes under SEBI’s Corporate Bond Fund category are a good bet.

These schemes, as mandated by SEBI, need to invest at least 80 per cent of their corpus in the highest-rated debt instruments, lowering their credit risk.

ICICI Prudential Corporate Bond Fund is a consistent performer in this category.

It has delivered a CAGR of 7.7 per cent and 8.5 per cent over three- and five-year periods, respectively.

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

Rate view

The CPI inflation has been on the rise, with inflation in November at 5.5 per cent, above the RBI’s comfort level of 4 per cent. The inflation led by the spike in food prices is unlikely to abate in the near term, which will limit future rate cuts by the RBI.

On the fiscal front, weak tax collections and worsening economic growth are key dampeners. A significant slip in fiscal deficit could lead to an increase in supply of bonds in the last quarter of the fiscal, owing to additional borrowings.

This can keep yields on G-Secs on an upward bias.

Given the uncertainty around interest-rate movements, investors can opt for a short-duration fund to cap the risk.

ICICI Prudential Corporate Bond has maintained its average maturity within 1.5-2.5 years over the past three years. This lowers its interest-rate risk in a volatile market.

Performance and portfolio

The fund has been a consistent performer. While it may not deliver dizzying returns — due to its lower duration (only partly cashing in on bond rallies) and higher investment in top-rated bonds (capping accrual gains) — its steady returns across rate cycles lend comfort to risk-averse investors.

In the 2014 bond rally, the fund delivered 9.4 per cent returns. In the tepid 2017 and 2018 markets too, it managed a healthy 6.2-6.4 per cent return, outperforming the category average.

The scheme has been investing 80-85 per cent of its assets in AAA rated bonds. As per its latest portfolio (as of November 2019), the fund has invested about 83 per cent in AAA rated and equivalent bonds, and 11.4 per cent in government securities. The fund’s average maturity is currently 2.58 years.

Top holdings in corporate bonds include high-rated (AAA) bonds of Power Finance Corporation, LIC Housing Finance, Rural Electrification Corporation, Reliance Industries, HDFC and NABARD.