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HDFC Corporate Bond Fund review: High-quality portfolio, low credit risk

The fund invests in highly-rated corporate bonds and has been a consistent performer

February 26, 2021 / 09:29 AM IST

Corporate bond funds have become a popular debt investment category in recent years. The category that registered the highest net inflows of about Rs 72,550 crore in the last one year. HDFC Corporate Bond Fund has been one of the better and stable performers in this category. Should you invest in the scheme?

What is it about?

HDFC Corporate Bond Fund (HCBF) invests in highly-rated corporate bonds, as per the category’s mandate. Corporate bond funds invest at least 80 per cent of their assets in the highest-rated (AAA and AA+) debt instruments and hence carry low credit risks.

Like all corporate bond funds, HCBF has restriction on the credit quality of its portfolio. “Since these funds aim to maintain a quality portfolio, they try to generate returns mainly through interest accruals,” says Anupam Joshi, Fund Manager-Fixed Income, HDFC AMC. Apart from this, allocating some portion to an active duration strategy helps to capitalise from the interest rate movements.

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“We also look at tactical opportunities whenever the spread between corporate and sovereign bonds looks attractive,” adds Joshi.

Anupam Joshi has been the fund manager since 2015.

A good quality portfolio

HDFC Corporate Bond Fund (HCBF) is a consistent performer within the category and has invested almost 100 percent of its assets in the highest-rated bonds over the past five years. In the past two years, this allocation has held the fund in good stead.

Over the past few years, a string of corporate bond downgrades and defaults rattled debt funds investors.

However, corporate bond funds did well as they were restricted from holding bonds with lower credit ratings. Of the 21 schemes, only three were exposed to such stressed cases.

Thanks to its prudent risk control strategy, HCBF has so far managed to avoid exposure to those highly rated groups that subsequently experienced credit stress: IL&FS, DHFL and ADAG.

Apart from investing in the highest-rated bonds, the scheme has also reduced its risk levels by ensuring a non-concentrated exposure. As per its December 2020 portfolio, the most it has invested in a single corporate group is 8.9 percent. The regulator, Securities and Exchange Board of India (SEBI), allows investments of up to 20 percent.

Consistent returns

HCBF has outperformed its peers across time periods. Over the past three-year period, the fund has given 9.1 percent returns, as against 7.6 percent managed by the category.

However, rolling returns are a better way to assess the consistency of a fund’s performance as they cover multiple entry and exit points. We took the scheme’s three-year rolling returns over five years. So, HCBF gave 8.2 percent returns, as opposed to its category average return of 7.2 percent.

The question is: will past returns be sustainable?

Last year, corporate bond funds gave good returns as interest rates fell. The compression in spreads (yield difference between an AAA-bond and government security of similar maturities) led to many corporate bond funds doing well, delivering over 10 percent returns.

But high borrowings announced in this year’s Budget have led to a spike in yields ever since. Increase in fiscal deficit and massive government borrowing plans for financial year 2021-22 have meant that interest rates may begin to rise eventually.

Joshi believes that the bond yields are likely to trade with an upward bias, though the upside should be limited. He advises investors to focus on short to medium duration debt funds.

Arun Kumar, Head of Research, FundsIndia cautions that while credit risk is minimal for the category, interest rate risk (as reflected in the modified duration) needs to be evaluated before choosing a corporate bond fund.

Investors with a 2-4-year time frame and looking for high credit-quality portfolios with moderate interest rate risks can consider investing in the scheme.

The fund currently has an average maturity of 4.4 years and yield-to-maturity of 5.4 per cent, which is healthy given the uncertain and low interest rates scenario and given the scheme’s predominant exposure to the highest-rated bonds.
Dhuraivel Gunasekaran
first published: Feb 24, 2021 11:00 am

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