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MC30 Review | A consistent performer that's low on risks, yet high on returns

Due to low yields, long-duration funds, including government securities’ funds and long duration funds lost 3.5 percent and 10 percent, respectively, over the last six months

June 25, 2022 / 02:34 PM IST
It has been tough for debt fund investors so far. Due to low yields, long-duration funds, including government securities’ funds and long duration funds lost 3.5 percent and 10 percent, respectively, over the last six month period. Schemes that followed an accrual strategy, like money market funds and liquid funds, generated a positive return of 3.1 percent and 3.5 percent, respectively. Hence, it is wise to allocate a part of your debt investments in funds that follow the combination of short duration as well as accrual strategy that can help mitigate interest-rate risk and deliver a balanced return over long run. Axis Short Term Fund (ASTF) is one such scheme. Part of short duration funds category, ASTF has a proven record since its launches. It has been one of eight debt schemes in the basket of MC30, a curated list of investment worthy mutual fund schemes. Devang Shah has been managing the fund since 2013.
It has been tough for debt fund investors so far. Due to low yields, long-duration funds, including government securities’ funds and long duration funds lost 3.5 percent and 10 percent, respectively, over the last six months. Schemes that followed an accrual strategy, like money market funds and liquid funds, generated a positive return of 3.1 percent and 3.5 percent. Hence, it is wise to allocate a part of your debt investments in funds that follow the combination of short duration as well as accrual strategy that can help mitigate interest-rate risk and deliver a balanced return over long run. Axis Short Term Fund (ASTF) is one such scheme. Part of short duration funds category, ASTF has a proven record since its launches. It has been one of eight debt schemes in the basket of MC30, a curated list of investment worthy mutual fund schemes. Devang Shah has been managing the fund since 2013.
Short duration funds invest in debt securities in such a way that the entire portfolio’s Macaulay duration remains between 1-3 years. In rising rate scenario, short duration funds are preferred bets as their short duration strategy reduces the volatility and also offer interest income. Here’s how short-term bond funds can protect you from sharp interest rate hikes: One: short-term bonds return investors’ funds quicker than long-term securities. It’s, therefore, easier to hold them until maturity. You can avoid rate risk if you hold bonds till maturity. Second, in a rising rate scenario, the proceeds of the short maturity papers can be redeployed in bonds with higher yields. This will improve the fund’s performance. Actively managed short duration funds such as ASTF can deliver a Bank FD beaten return over the long run. Investors with 3-year time horizon can consider investing in the fund.
Short duration funds invest in debt securities in such a way that the entire portfolio’s Macaulay duration remains between 1-3 years. In rising rate scenario, short duration funds are preferred bets as their short duration strategy reduces the volatility and also offer interest income. Here’s how short-term bond funds can protect you from sharp interest rate hikes: One: short-term bonds return investors’ funds quicker than long-term securities. It is, therefore, easier to hold them until maturity. You can avoid rate risk if you hold bonds till maturity. Second, in a rising rate scenario, the proceeds of the short maturity papers can be redeployed in bonds with higher yields. This will improve the fund’s performance. Actively managed short duration funds such as ASTF can deliver a Bank FD beaten return over the long run. Investors with three-year time horizon can consider investing in the fund.
ASTF has been a steady performer within the category. It has been an impressive track record over the last four years thanks to the fund manager’s active duration and cash call strategy. Some schemes in this category may outperform on account of their investments in slightly lower-rated bonds. For instance, in the last six months, 11 out of 26 schemes in short duration category had allocated at least five percent to lower-rated bonds (rated AA & Below). Meanwhile ASTF has held relatively smaller allocation of around one percent to the AA and below debt papers. Rolling return calculated from the last seven years NAV data shows that ASTF generated a compounded annualised growth rate of 7.7 percent while the category gave 6.8 percent (category average was calculated after excluding the schemes that were hit badly by distressed assets).
ASTF has been a steady performer within the category. It has been an impressive track record over the last four years thanks to the fund manager’s active duration and cash call strategy. Some schemes in this category may outperform on account of their investments in slightly lower-rated bonds. For instance, in the last six months, 11 out of 26 schemes in short duration category had allocated at least 5 percent to lower-rated bonds (rated AA and below). Meanwhile, ASTF has held relatively smaller allocation of around 1 percent to the AA and below debt papers. Rolling return calculated from the last seven years NAV data shows that ASTF generated a compounded annualised growth rate of 7.7 percent while the category gave 6.8 percent (category average was calculated after excluding the schemes that were hit badly by distressed assets).
ASTF has managed to deliver better returns compared to the peers in most of the rising and falling interest rate cycles.
ASTF has managed to deliver better returns compared to the peers in most of the rising and falling interest rate cycles.
The fund invests significantly in high-rated assets; highest-rated corporate bonds and g-secs. Devang Shah, fund manager of the ASTF says, “In the last two months, we have seen 130 basis of cumulative rate hikes from the RBI, mainly to combat inflation. I think the inflation is quite centralised now and probably in the next six months the inflation will remain elevated across globally including India. There could be another 50 to 75 basis of rate hike in the next two policies. Over the last one year, we were following a barbell strategy --keeping cash and buying some long assets. Now, with this kind of rate hikes already been done and a large part of the rate hikes are priced in, we are now incrementally adding two to four year of corporate bonds and g-secs”. In anticipation of spread widening and liquidity, we have added more g-secs, adds Shah. ASTF had held floating rate assets in the past six months that benefitted from the uncertainty in the rate hike.
The fund invests significantly in high-rated assets; highest-rated corporate bonds and G-secs. Devang Shah, fund manager of the ASTF says, “In the last two months, we have seen 130 basis points of cumulative rate hikes from the RBI, mainly to combat inflation. I think the inflation is quite centralised now and probably in the next six months the inflation will remain elevated across globally, including India. There could be another 50 to 75 basis of rate hike in the next two policies. Over the last one year, we were following a barbell strategy - keeping cash and buying some long assets. Now, with this kind of rate hikes already been done and a large part of the rate hikes are priced in, we are now incrementally adding two to four year of corporate bonds and G-secs.” In anticipation of spread widening and liquidity, we have added more G-secs, adds Shah. ASTF had held floating rate assets in the past six months that benefitted from the uncertainty in the rate hike.
ASTF has managed with high quality portfolio with most of the corporate bonds held were issued by the market leaders in their respective segments. “80 to 85% will always be invested in AAA/A1+ rated bonds and sovereign instruments. Remaining 15-20% will be invested in AA category. The fund does not allow to go beyond AA-“ says Shah. Exposure to AT1 bonds too brought down to less than one percent.
ASTF has managed with high-quality portfolio with most of the corporate bonds held were issued by the market leaders in their respective segments. “Some 80 to 85 percent will always be invested in AAA/A1+ rated bonds and sovereign instruments. Remaining 15-20 percent will be invested in AA category. The fund does not allow to go beyond AA-," says Shah. Exposure to AT1 bonds too brought down to less than 1 percent.
Apart from investing mostly in the highest-rated bonds, ASTF has also reduced its risk levels by ensuring that it doesn’t invest a lot in any single group. As per its latest available portfolio, the most it has invested in a single corporate group is 10.2 percent. The regulator, Securities and Exchange Board of India (SEBI), allows a limit of up to 20 percent.
Apart from investing mostly in the highest-rated bonds, ASTF has also reduced its risk levels by ensuring that it doesn’t invest a lot in any single group. As per its latest available portfolio, the most it has invested in a single corporate group is 10.2 percent. Market regulator Securities and Exchange Board of India (SEBI) allows a limit of up to 20 percent.
ASTF has maintained its portfolio average maturity between 1.3 year and 3.1 years over the last five years. Over the last one year, the average maturity of the fund has been reduced to 2.3 years from 2.9 years. Accrual play has also helped the fund to deliver better returns over the periods.
ASTF has maintained its portfolio average maturity between 1.3 year and 3.1 years over the last five years. Over the last one year, the average maturity of the fund has been reduced to 2.3 years from 2.9 years. Accrual play has also helped the fund to deliver better returns over the periods.
Dhuraivel Gunasekaran
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