Fund Call. Kotak Corporate Bond Fund: A safe and steady choice

Debt mutual fund investors need to watch out for two key risks — interest-rate risk and credit risk. Corporate bond funds, and Banking and PSU funds are considered relatively safe, though individual schemes within them may carry higher levels of risk.

Conservative investors can choose schemes from these two categories for their core debt portfolio. Here, we look at corporate bond funds.

Cap your risk

Corporate bond funds are debt funds that must invest at least 80 per cent of their assets in only the highest-rated corporate bonds (typically AA+ and above).

This lends a certain degree of safety to investor returns.

That said, one needs to check where the remaining 20 per cent is invested in — in sovereign/AAA rated or lower-rated debt securities — for gauging the credit risk in the scheme. It’s also worth looking at the average maturity of the portfolio — higher the maturity, greater the interest rate risk. That is, when interest rates rise (fall), funds which hold relatively low maturity debt papers get impacted to a smaller extent by a fall (rise) in bond prices and the resultant capital loss (gain). With many businesses and the economy yet to fully recover from the impact of the Covid-19 pandemic, capital preservation remains top priority. Also, while interest rates appear to have bottomed out, a hike in rates does not appear imminent.

If you want to play it safe, you can invest in debt schemes with relatively low average maturity.

Investors with a moderate risk appetite and an investment horizon of up to three years can, therefore, consider investing in corporate bond funds that invest largely in highest-rated papers (even beyond the mandated 80 per cent) and have relatively short average maturity. This can limit your credit as well as interest-rate risk.

Good credit quality

In the last five years, corporate bond funds have, on average, generated one- and three-year rolling returns (CAGR) of 8.2 per cent and 7.7 per cent, respectively.

Among the top performers, investors can consider Kotak Corporate Bond Fund. The scheme has generated one- and three-year average rolling returns of 8.4 per cent and 8.2 per cent, respectively. This puts it at par with some of the other well-performing schemes in the category.

Going by the past five years’ data, Kotak Corporate Bond Fund also seems to have provided some downside protection to investor returns.

During this period, the scheme fetched one-year rolling returns (CAGR) of under 6 per cent less than 1 per cent of the time. This is significantly lower than that for most peers. More importantly, on a three-year rolling returns (CAGR) basis, the scheme gave at least 8 per cent 70 per cent of the time, a higher percentage than that for many peers.

The scheme fares well on the credit quality front, too.

As on November 27, 2020, Kotak Corporate Bond Fund held 89.4 per cent of its portfolio in AAA rated (or equivalent) and sovereign debt papers. It has consistently held 89 per cent and upwards of its portfolio in AAA rated and sovereign debt papers since July 2018.

The fund has largely maintained an average portfolio maturity of 1-2.3 years in the past five years. As on November 30, 2020, it was 2.38 years, relatively lower than that of its peers. This may cap the extent of capital loss for the fund when the rate cycle turns up. However, this can also limit the capital gains from an appreciation in bond prices in a falling interest-rate environment.

Investors who want to limit their interest-rate risk may, however, do well to invest in such a scheme.

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