Mutual Funds

ICICI Prudential All Seasons Bond: Rides on the rate movements

Radhika Merwin | Updated on August 18, 2019 Published on August 17, 2019

The dynamic bond fund has consistently delivered across rate cycles

After a rocky 2018, long-duration gilt funds have had a healthy run so far this year. On the back of the yield on 10-year G-Secs falling by a tidy 80-90 basis points, these funds have made a solid comeback. But after a substantial 60 bps fall in July, the yield on 10-year G-Secs inched up last week, possibly on renewed concerns over the Centre’s fiscal deficit. While the RBI lowered its key policy repo rate by 35 bps recently, much of the positives have been priced in. Clarity on foreign sovereign bond issuance is awaited, which, if happens, can offer some respite to the bond market.

With so many moving parts and uncertainty over several factors, it is a tall task for retail investors to take a call on the movement in bond yields. Hence, if you are an investor with a moderate-risk appetite wanting to ride the bond price rally, dynamic bond funds that invest across durations is a good bet.

Dynamic bond funds essentially ride on rate movements, and the fund manager alters the duration of the fund portfolio depending on the expectation of rate movements. ICICI Prudential All Seasons Bond Fund (earlier ICICI Prudential Long Term Plan) is a dynamic bond fund that has consistently delivered across rate cycles.

The fund has delivered annual returns of 8-10 per cent over longer three-, five- and 10-year periods, beating category performance by about 2 percentage points. Over the past year, the fund has delivered a handsome 10 per cent return. Investors with a two- to three-year horizon can invest in the fund.


Performing across cycles

ICICI Prudential All Seasons Bond Fund has delivered across rate cycles. For instance, the fund made healthy returns of 16-19 per cent in the good years of 2014 and 2016.

In 2017 — a sombre year for bond market — it managed to deliver 5 per cent returns, even as long-term gilt funds delivered just 2-3 per cent returns. Actively managing duration has helped the scheme cap losses in volatile markets. It also helps in riding the bond rally.

If the interest rates move up, bond prices fall, and vice-versa. In other words, interest rate and bond prices are inversely related. Debt fund NAVs rise or fall along with the underlying bond prices. As long-duration bonds are more sensitive to interest rates, the fund manager increases duration when rates fall, to cash in on the rally in bonds. In a rising-rate environment, the fund manager reduces the duration of the fund, which helps cap losses.

ICICI Prudential All Seasons Bond has been taking active duration calls to tide over various rate cycles.

The fund’s average maturity has been varying from one year to 13 years over the past three years. This active management has helped the fund deliver category-beating returns across time periods.

The scheme has been increasing its average maturity since 2018, and it stands at 4.5 years. This should help the fund cap losses if markets turn unfavourable, and also offers headroom to cash in on bond rallies.

In the past, the fund has invested mostly in G-Secs and high-rated (AA+ and above) bonds. As of July 2019, the fund has invested 19.6 per cent in G-Secs and 36.8 per cent in AAA rated bonds.

Published on August 17, 2019
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