Mutual Funds

Why Axis Banking & PSU Debt Fund is a good investment

Maulik Madhu BL Research Bureau | Updated on July 11, 2021

The fund consistently invests almost all its assets in AAA and A1+ rated and sovereign debt papers

While investing in debt funds, one must check for two key risks — credit risk and interest rate risk.

A fund that invests significantly in the highest-rated AAA and A1+ and sovereign debt papers ranks high on credit quality.

If the portfolio contains debt papers with relatively lower maturity, then the interest rate risk too is capped. This is especially so today, when interest rates are at a historic low and are expected to gradually inch upwards once concerns over growth subside. When that happens, NAVs of debt funds with a relatively lower maturity will be less impacted by the fall in bond prices.

Launched in June 2012, Axis Banking & PSU Debt Fund is a category top performer that provides good downside protection too. Those with a moderate risk appetite and an investment horizon of one year or longer can consider investing in the scheme.

The category has seen one-year, three-year and five-year average rolling returns of 8.3 per cent, 7.9 per cent and 8.2 per cent (all CAGR), respectively over the last seven years. Compared to this, Axis Banking & PSU Debt Fund has fetched 8.5 per cent, 8.3 per cent and 8.5 per cent (all CAGR), respectively.

The scheme has also provided good downside protection during this period. Over the past seven years, it has fetched a one-year return of less than 5 per cent (CAGR) only 0.8 per cent of the time compared to 8 per cent of the time for the category.

Over the same period, the scheme has generated one-year return of 7 per cent (CAGR) or higher, 83 per cent of the time compared to 76 per cent of the time for the category.

About the category

As mandated by SEBI, Banking and PSU Funds must invest at least 80 per cent of their assets in debt instruments of banks, public financial institutions and public sector undertakings. Funds from this category typically invest a large proportion of their assets in AA-rated and above papers.

There is, however, a wide range in portfolio duration (average maturity) across funds.

As of May-end 2021, this ranged from under three months for Sundaram Banking & PSU Debt Fund to eight years for the Edelweiss Banking and PSU Debt Fund. Many schemes in this category have also invested in the relatively riskier perpetual bonds that, unlike regular bonds, have no specific maturity date.

Axis Banking & PSU Debt Fund has been consistently investing almost all its assets in AAA and A1+ rated and sovereign debt papers.

As of May-end 2021, 96 per cent of the fund corpus was invested in such debt papers. AAA and A1+ are the highest credit ratings assigned to long-term and short-term corporate debt instruments, respectively. As of June 15, 2021, the scheme had zero exposure to perpetual bonds as per data from CRISIL.

Rate risk capped

The scheme has also largely maintained a relatively low average maturity portfolio since its inception in 2012. Lower the maturity, lower the interest rate risk and the volatility in returns. In May 2018, though, the average maturity of the scheme rose sharply to 3.7 years, only to go down gradually over the succeeding months.

The rise came about as the scheme portfolio composition changed from 42-44 per cent each in corporate bonds and money market instruments in April 2018 to 91 per cent in corporate bonds in May 2018. This was done to take advantage of the higher yields on corporate bonds.

During the 12 months ending May 2021, the portfolio maturity has averaged 1.8 years.

It was 1.55 years as of May-end. Around 28 per cent of the scheme assets were invested in debt papers with a maturity of up to 12 months and another 60 per cent in those maturing in 1-3 years.

Given the expectation of a rate rise, the roll-down strategy followed by the scheme whereby it holds bonds until maturity should help bring down the associated interest rate risk over time.

Published on July 10, 2021

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