Investors looking for debt schemes with the highest credit quality and relatively less affected by interest rate risk can consider Banking and PSU Debt funds. Nippon India Banking and PSU Debt fund (NBPDF) is one such scheme. It manages its portfolio with a lower maturity profile and has the highest quality papers. NBPDF is part of MC30, a curated basket of investment worthy schemes for all type of investors. Launched in May 2015, NBPDF has delivered a compound annualized growth rate of 8 percent since its launch. The scheme is jointly managed by Praney Sinha and Vivek Sharma.
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Over the last one year, debt mutual funds (barring credit risk schemes) delivered middling returns due to RBI’s measures towards boosting economy recovery with the supply of liquidity. But inflation is increasing and there are concerns over possible rate hikes. Arun Kumar, Head of Research, FundsIndia says, “currently, we are at a stage where inflationary pressure is being felt globally. In India, the economic recovery is already starting to happen. The RBI will take off all the emergency measures it took. Broadly, the consensus is that interest rates can't stay at these extremely low levels for a long time. In the last six months, the yields across the curve have started to inch up. Over the next one year and a half years, we'll see a cycle where interest rates are moving up.” In this transition phase, it will be difficult for debt funds deliver high returns. “If you want to reduce the volatility, then it is better to get into funds which have a slightly lower duration,” Kumar adds. With lower average maturity, NBPDF will likely contain such downside well.
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NBPDF has outperformed peers in almost all falling interest rate scenarios, but underperformed the category in some of rising rate scenarios.
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As per SEBI’s mutual fund classification guidelines, Banking and PSU debt Funds must invest at least 80 percent of their assets in the instruments issued by banks, public sector undertakings (PSUs) and public financial institutions (PFIs). NBPDF has always invested at least two-thirds of its total assets in bonds issued by the PSUs, PSU Banks and PFI. The quality private banks in the portfolio include HDFC Bank, ICICI Bank, Axis and Kotak Bank. Apart from 80 percent of the portfolio comprising PSUs and Bank debt papers, NBPDF has allocated the remaining portion to G-secs and also private corporate bonds.
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Praney Sinha says, “NBPDF has been designed to provide a good risk-reward kind of experience to investors while taking slightly lower risk. There are various kind of discipline imposed in addition to what was demanded by SEBI. The modified duration of the fund has been restricted between 1.5 and 3.5 years at any point and there is a restriction on the security issuer concentration, which is lower than SEBI’s prescribed limit.” The portfolio has always been managed with 90 percent liquid assets, Sinha adds.
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Over the last three years, the fund has invested only in the highest rated AAA debt instruments issued by banks and PSUs. This mitigates the overall credit risk in the portfolio. Debt papers issued by Banks, PSUs and PFI are usually of high credit quality. PSUs enjoy quasi sovereign status due to Government backing while Banks (both public sector and private sector) enjoy high credit rating because they are regulated entities and are usually adequately capitalized. Typically, these funds do not invest in Non-Banking Financial Companies (NBFCs) which may have varying credit ratings. It had held private corporate bonds with strong financials such as those of Reliance Industries and Bajaj Housing Finance. It has not invested in any AT1 bonds. It was one of the funds that avoided the credit fiasco, which impacted the MF industry during 2018-2020.
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As per its December 2021 portfolio, the most it has invested in a single corporate group was 9 percent. SEBI allows investments of up to 20 percent.
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Though there is no regulatory restriction on duration management for this category, the fund has restricted itself to play the modified duration between 1.5 and 3.5 years. The fund follows a blend of accrual and duration strategies. It tactically uses G-secs based on the interest rate outlook to generate alpha. Over the last one year, the average maturity of the fund has been reduced to 2.9 years from 4.14 years eying on the rising interest rate situation. “It helped to contain downsides well,” says Sinha.
