Mutual Funds

Franklin India Banking & PSU Debt: Relatively safe strategy, sound performance

Anand Kalyanaraman | Updated on August 11, 2019 Published on August 11, 2019

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The fund has delivered about 11.5% returns over the past year

In recent times, debt funds seem to have fallen out of favour with many investors due to instances of credit default by some borrowers and the resultant losses to investors. But there are some categories that seek to play it relatively safe on the credit side and yet deliver good returns.

Banking and PSU debt funds, for instance, tend to have relatively low credit risk since they invest a chunk of their money (at least 80 per cent) in debt instruments of banks, public sector entities and public financial institutions. These companies, so far, have had a good track record on debt servicing and repayment.

That said, banking and PSU debt funds do have the leeway of investing the remaining 20 per cent of their money in other instruments, and some funds in the category did find themselves on the wrong foot in recent times with exposure to troubled corporate papers such as IL&FS and DHFL.

But the others in the category stayed clear of such trouble and have delivered healthy returns at low risk. Among these is Franklin India Banking & PSU Debt.

The fund has delivered about 11.5 per cent returns over the past year and annualised returns of about 8 per cent and 8.5 per cent over three and five years, respectively. This places it among the top performers in the category.


High-rated picks

These good returns are despite a fairly safe portfolio. As of June 2019, nearly 90 per cent of the portfolio is in debt instruments and the rest is in cash and equivalents. Out of the debt investments, about 80 per cent have the highest credit rating — AAA for bonds and A+ for short-term debt — while the rest have ratings of AA+, AA and AA-. Between November 2017 and April 2018, the scheme had some exposure (4-5 per cent) to instruments rated A, but has since exited from these. The high proportion of high-rated instruments reduces the credit risk significantly, even if not completely, given the exposure to some private sector companies.

As of June 2019, about 60 per cent of the portfolio is in bonds of PSUs and public financial institutions, about 25 per cent is in corporate debt, 6 per cent is in money market instruments and the rest is in cash. The PSU/PFI bond portfolio includes names such as Power Finance Corporation, NABARD, BPCL, NHAI, ONGC Petro Additions, IRFC, FCI and REC — these are predominantly rated AAA.

The corporate debt portfolio includes names such as Bank of Baroda, ICICI Bank, RBL Bank, Andhra Bank and Pipeline Infrastructure (an erstwhile group company of Reliance Industries). In all, the fund has 31 securities in its portfolio.

Along with low credit risk, the fund also has low interest-rate risk — the possibility of a fall in the portfolio value if market interest rates rise

This is shown in its moderate average maturity of about three years. Over the past three years, the average maturity of the scheme has been low to moderate for the most part (2-4 times). It helps that the fund’s expense ratio is quite low — 0.55 per cent for regular plans and 0.22 per cent for direct plans; a low expense ratio aids returns.

Published on August 11, 2019
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