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Betting on a downward movement in the interest rate cycle and an improving business environment, a new open-ended debt fund — Birla Sun Life Corporate Bond — has been launched.
The fund will invest in corporate bonds with a short to medium-term tenure, spanning a range of risk profiles.
The new fund is thus a play on two themes.
One, given that the RBI is expected to cut its policy rate by another 50 basis points by the end of the year, bond prices are expected to rally further. Two, the fund will also capitalise on interest receipts, betting on instruments with increased credit risk to earn higher interest.
Aggressive betsBenchmarked against the Crisil AA Short Term Bond Fund Index, the fund will invest only in corporate bonds and not in government securities and state developmental loans.
A good 70-75 per cent of its portfolio will be in bonds rated below AAA – AA and A, with equal weightage to both.
The new fund is similar in mandate to the likes of Franklin Corporate Bond Opportunities, Franklin Income Opportunities and Birla Sun Life Medium Term Plan .
Franklin Corporate Bond, for instance, has on an average invested half of its assets in AA rated bonds, and close to a fifth in A rated bonds in the past.
Birla Sun Life Medium Term Plan too has over half of its assets in A and AA rated bonds.
The yield to maturity (YTM) for these funds has been in the range of 10.6 to 12 per cent.
Birla Sun Life Corporate Bond Fund also seeks to maximise credit opportunities and maintain the YTM at 10.5-11 per cent.
A tad riskierThe new fund however is a tad riskier, however, given its relatively higher duration.
Its peers on an average have duration of about 2.5-2.7 years. The new fund is likely to have a duration of about three years to start with (can go up to four years), and hence will carry a higher interest rate risk.
However, the reinvestment risk is lower when compared with fixed deposits or liquid funds, as it will lock into higher rates for the medium term.
Also, while the fund invests in low rated debt instruments, these are mostly secured against tangible assets, which mitigate the risk.
The fund will be managed by Maneesh Dangi, who also manages the Birla Sun Life Medium term Plan.
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