Playing on rate cut expectations
Bandhan Long Duration Fund looks to gain from the likely fall in bond yields
A credible path to fiscal consolidation, improving current account deficit, inclusion of government securities in global bond indices and peaking of local and global interest rates point to softening yields over the next year or so. And rate cuts, too, may follow later this year or early in 2025.
Bond prices and yields are inversely related. Yields and interest rates move in similar directions. Thus, a softening of yields and interest rates in the future holds potential for a bond price rally in government and other longtenured securities.
In this regard, Bandhan has rolled out a longduration fund to take advantage of the current rate and yield scenario. The NFO closes on March 18.
RATES AND YIELDS
The RBI has been on pause mode for over a year now. Inflation is now well under control. Even the US Federal Reserve has stopped rate hikes for several months now.
A reduction is expected in the second half of 2024 or over 2025.
India’s current account deficit is at near recordlows. In the first half of FY24, the current account deficit was just $17.5 billion or about 1 per cent of GDP, much lower than the 2.9 per cent reported in the AprilSeptember period of FY23.
Fiscal deficit is also down from 6.4 per cent of GDP in FY23 to 5.8 per cent in FY24 and is further likely to decline to 5.1 per cent in FY25, going by the recent interim budget announcements.
From June this year, JP Morgan will add Indian bonds available in the fullyaccessible route leading to around $24 billion in inflows. Bloomberg, too, has indicated addition of Indian bonds from January 2025, which would bring in an additional $5 billion.
These inflows can impact yields and make them move down over the medium to long term. That makes a case for bond price increase via longduration funds.
ABOUT THE NFO
Bandhan Long Duration fund will invest in bonds and money market instruments that mature over the long term. So, the Macaulay duration for the fund’s portfolio would be more than seven years.
As such, longduration funds are more susceptible to rate changes on the upside. Rate hikes can have an adverse impact in such funds, while rate cuts help them gain.
A rate cut over the next year or so can have a positive impact in longduration funds.
Most funds in the category do not have a long track record. In the last one year, longduration funds made the most of the fall in yields. The 10year gsec yield fell from 7.35 per cent levels to 7.05 per cent levels. Long duration funds recorded 9.511.5 per cent returns over the past one year. Only Nippon India Nivesh Lakshya and ICICI Prudential Long Term Bond funds have reasonably long record of fiveplus years.
Investors can consider these funds with a longterm perspective and align it to a goal.
Those wishing to take fresh guard can consider a small lumpsum in the Bandhan Long Duration NFO if they have an aboveaverage risk appetite.
With the indexation benefit unavailable for all debt funds, the lone advantage they have is that gains are taxed only upon sale.
Asset management companies employ diverse investment strategies to select stocks from the broad market, aiming to achieve returns that outperform the market. One such strategy, which mitigates the subjective bias of fund managers in investment decisionmaking, is Quantitative Investing. This method uses mathematical models and predefined criteria to rapidly analyse and backtest extensive historical data, assessing the effectiveness of strategies against benchmarks.
Currently, there are nine mutual funds in India using quant investing strategies, including Nippon India Quant, SBI Equity Minimum Variance (though not strictly adhering to a quant strategy), DSP Quant, Tata Quant, ICICI Pru Quant, Quant Quantamental, Axis Quant, 360 ONE Quant, and Kotak Quant. These funds collectively manage assets totalling ₹4,800 crore. Additionally, Aditya Birla Sun Life has submitted a draft document to SEBI for their quant fund. Here’s an overview of the methodologies adopted by fund houses and how they have fared so far.
MODEL APPROACHES
Quantitative funds employ either singlefactor or multifactor models to streamline their investment scope, often transitioning from a broad index like the S&P BSE 200 TRI to a tailored model portfolio based on these variables. Singlefactor investing focuses on factors such as valuations, fundamentals, quality, and statistical measures to construct investment portfolios. Conversely, multifactor investing integrates a blend of factors to develop portfolios, which tends to be more intricate and refined. This approach necessitates advanced quantitative modelling techniques and thorough data analysis to pinpoint the optimal combination of factors – typically manifesting as ratios including pricetoearnings (P/E), pricetobook (P/B), dividend yield, return on equity (ROE), return on capital employed (ROCE), standard deviation, and beta. Subsequently, once the model is finalised, each company undergoes ranking and selection processes based on the specific factor being evaluated.
FUND METHODOLOGIES
In the quantitative space, seven out of nine funds follow either the BSE 200 or NSE 200 as benchmarks, which is a balanced mix of large and midcap stocks. While the SBI Equity Minimum Variance Fund is benchmarked against the Nifty 50 TRI, Quant’s Quantamental Fund employs the broader Nifty 500 TRI as its benchmark.
Most fund houses adopt the multifactor approach: to develop proprietary models, systematically identify investment opportunities, manage risks, and potentially enhance returns over the long term. In contrast, the SBI and 360 ONE (previously IIFL) funds are the only ones following the singlefactor approach. The former aims to minimise volatility through a blend of risk and factorbased parameters, while the latter adopts a thematic momentum strategy.
As the oldest fund in the category, Nippon India Quant Fund employs a multifactor approach, considering a blend of parameters, including valuation, earnings, price, momentum, and quality for quarterly stock screening. Quant’s Quantamental Fund, too, focuses on a mix of fundamental, quantitative, predictive and behavioural analytics to construct its stock portfolio. Although both funds claim to be quantoriented, there is human intervention too, as the funds are actively managed and stock weights are determined by the fund manager. Likewise, Kotak fund, the latest entrant in the quant space, combines datadriven quantitative models with human expertise to select stocks with quality and momentum characteristics.
Tata Quant Fund uses a quantitative model powered by machine learning algorithms, focusing on parameters including macroeconomic variables such as yield spreads and fundamental metrics such as P/E and P/B ratios. Both DSP and ICICI funds adopt a multifactor approach, beginning with the elimination of certain companies based on predefined exclusion criteria such as high default risk and poor corporate governance. Subsequently, the DSP fund employs a combination of five factors corresponding to quality, value and growth styles ensuring low correlation between each factor, while the ICICI fund’s selection process integrates macroeconomic, fundamental and technical factors. Similarly, Axis Quant strategy, with its QGARP model (Quality Growth At Reasonable Price), operates on a combination of three factors – fundamental, technical, and liquidity.
It’s always crucial to comprehend the underlying factors and methodologies these funds use before considering investments.