Conservative on risk, high on returns

HDFC MEDIUM TERM OPPORTUNITIES FUND

Launched in June 2010, HDFC Medium Term Opportunities Fund features in the debt short fund category of CRISIL Mutual Fund Ranking. The fund has been constantly ranked in the top 30 percentile (CRISIL Fund Rank 1 or 2) in the 12 quarters ended December 2017. Its month-end assets under management (AUM) more than tripled from ~34.12 billion in April 2015 to ~114.33 billion in March 2018.

Anupam Joshi has been managing the fund since October 2015. The investment objective of the fund is to generate regular income through investments in debt/money market Instruments and government securities (G-secs) with maturities not exceeding 60 months.

Superior performance

The fund has consistently outperformed its benchmark (CRISIL Composite Bond Fund Index) over the trailing periods under analysis. It has significantly outperformed the benchmark during the past six months and one year in spite of fall in prices of securities with rise in bond yields during this period.

Timely decline in modified duration and predominant allocation to corporate bonds helped the fund consistently outperform the benchmark in the periods under analysis.

A sum of ~10,000 invested in the fund since inception would have grown to ~19,235 (8.71 per cent CAGR) on April 26, 2018 compared with ~18,599 (8.25 per cent CAGR) for the peer group and ~18,134 (7.9 per cent CAGR) for the benchmark.

Systematic investment plan (SIP) is a disciplined mode of regular investments offered by mutual funds to investors. A monthly SIP of ~10,000 over seven years (an investment of ~840,000) would have grown to around ~1,133,337 earning 8.45 per cent per annum as on April 26, 2018. A similar investment in the benchmark would have grown to around ~1,117,309 at 8.05 per cent per annum. Duration management The fund has been true to label, maintaining the average maturity of the portfolio below five years (2.76 years on average) during the past three years. During this period, modified duration ranged from 1.23 to 2.84 years, averaging 2.23 years.

The fund increased duration from 1.23 years in November 2015 to 2.69 years in November 2016. This proved to be a correct call as G-sec yields declined during this period by 154 bps. In the past one year, when G-sec yields of corresponding maturity increased by 47 bps, the fund reduced interest rate risk to the portfolio by cutting its modified duration from 2.68 years in April 2017 to 2.16 years in March 2018.

Portfolio analysis

The fund has predominantly invested in corporate bonds (non-convertible debentures and bonds) during the past three years. The allocation to corporate bonds ranged from 63 per cent to 85 per cent. Allocation to G-secs ranged 0.24 per cent to 32 per cent during the same period. Allocation to G-secs declined from 26 per cent in March 2017 to about 19 per cent in March 2018. Corporate bond allocation increased during the same period from 73 per cent to 79 per cent.

The fund has been conservative in managing the credit risk exposure of the portfolio during the past three years. The corporate debt component of the portfolio has been largely allocated to AAA and A1+ rated securities, averaging 75 per cent of the portfolio. Allocation to sovereign securities averaged 16 per cent during this period.

CRISIL Research