Corporate bond funds and Banking & PSU debt funds add stability to your portfolio. Meet MC30’s debt fund stars

If equities are meant to give a kicker in returns, then debt funds are meant to add stability in your portfolio. This is the only reason why MC30- a carefully curated basket of 30 investment-worthy mutual fund schemes by Moneycontrol- has only three debt fund categories out of 16; short-term bond funds, corporate bond fund and banking & PSU debt funds.

But that doesn’t mean we do not look for potential risk bombs in these categories. We actually did; and here is what we found.

Also read: Why must you invest in debt funds? Meet MC30’s debt fund stars

Credit risks penalised

Events in the past two years have shown that credit risk in a debt fund can destroy wealth. Over the past two years, a spate of corporate bond downgrades and defaults have impacted the performance of several debt funds.

Any debt scheme that has held five percent and more in AA and below rated securities, as per the scheme’s latest portfolio.

Thirty percent of corporate bond funds that qualified for MC30 ratings and rankings got penalised here.

Too much investment in a single group is bad

Though the Securities and Exchange Board of India (SEBI) has allowed funds to invest upto 20 percent of their corpuses in a single group, MC30 penalised funds that have invested more than 10 percent in any single group of companies, as per their latest portfolio.

Fifty percent of Banking & PSU debt funds that qualified for MC30 ratings and rankings got penalised here.

Also read: MC30: The methodology behind the curated basket of mutual fund schemes

Debt – Banking & PSU

Nippon India Banking & PSU Debt Fund

Nippon India Banking & PSU Debt Fund (NBPDF) has been a top quintile scheme in its category across timeframes. Over the last two years, the fund has invested only in the highest AAA rated instruments issued by government-owned firms and banks. But it also tactically invests around 20 percent in g-secs to use interest rate movements to its advantage.

The fund also invests a small portion in private corporate firms that come with strong financials, such as Sundaram Finance and Bajaj Housing Finance. The fund has avoided Additional Tier-1 (AT1) bonds.

Kotak Banking and PSU Debt Fund

Kotak Banking and PSU Debt Fund (KBPDF) avoids bonds issued by private-sector firms. Instead, it sticks to securities issued by banks, state-owned firms and g-secs.

But it does invest around 13 percent of its assets in AA and equivalent rated securities to earn a returns kicker. Additionally, it has held around 9 percent in AT1 bonds. But Lakshmi Iyer, chief investment officer-fixed income and head of products, says that these have been issued by banks with strong financials.

IDFC Banking and PSU Debt Fund

True to the fund house’s aversion to taking credit risk, IDFC Banking and PSU Debt Fund (IBPF) has consistently held a high-quality portfolio. Almost its entire portfolio comprises AAA and equivalent rated instruments over the last three years. This mitigates the overall credit risk in the portfolio. It also avoids AT1 bonds.

To compensate for its conservative approach, it allocates slightly more to its top holdings, going up to 12 percent for individual securities.

 Also see: The complete MC30 basket of mutual fund schemes

Debt – Corporate Bond

Sundaram Corporate Bond Fund

Sundaram Corporate Bond Fund (SCBF) has consistently invested nearly all of its corpus in AAA securities for the past five years. Its fund managers Dwijendra Srivastava and Sandeep Agarwal invest in securities issued by government-owned firms and private sector companies that come with strong financials. And it prefers those that come with up to a three-year maturity.

SCBF has managed to avoid credit events. It allocates 10-20 percent in government securities depending on the interest rate outlook. Maintaining the right maturity profile and sticking to securities whenever the spreads are attractive have helped the fund outperform its category across timeframes.

 Also read: Presenting, MC30's largest equity fund entrants

 HDFC Corporate Bond Fund

HDFC Corporate Bond Fund (HCBF) is the second largest fund in its category with assets of close to Rs 26,546 crore (as on July 30, 2021). Multiple credit events have led to flight-to-safety moves among debt fund investors. And larger fund houses with a good brand names such as HDFC AMC have benefitted from increased inflows. And HCBF has rewarded investors with its good performance.

Despite SEBI’s minor leeway that allows schemes to invest up to 20 percent in lower-rated assets, HCBF has consistently deployed nearly all its corpus in highly-rated (AA+ and above) securities. Its prudent risk control strategy helped HCBF navigate the debt fund crisis, successfully.