Con­sis­tency across rate cy­cles

In­vestors with a two- to three-year hori­zon can in­vest in the dy­namic bond fund

The Hindu Business Line - - MUTUAL FUNDS - RAD­HIKA MERWIN

After a rocky 2018, bond mar­kets are in for a bumpy ride in 2019 as well.

On the one hand, a lower in­fla­tion read­ing over the past sev­eral months, the sud­den change of guard at the RBI re-kin­dling hopes of a softer mon­e­tary pol­icy, and in­creas­ing pace of open-mar­ket op­er­a­tions (buy­ing of gov­ern­ment bonds) are pos­i­tives for the bond mar­ket.

On the other hand, the larg­erthan-ex­pected mar­ket bor­row­ings an­nounced by State gov­ern­ments for the Jan­uary-March 2019 quar­ter, the Cen­tre’s fis­cal po­si­tion, and pos­si­ble risks to in­fla­tion are head­winds in the com­ing months.

Hence, if you have a mod­er­ate risk ap­petite and want a piece of the ac­tion when bond prices rally, dy­namic bond funds that in­vest across du­ra­tion is a good bet.

Dy­namic bond funds es­sen­tially ride on rate move­ments, and the fund man­ager al­ters the du­ra­tion of the fund port­fo­lio de­pend­ing on the ex­pec­ta­tion of rate move­ments.

ICICI Pru­den­tial All Sea­sons Bond Fund (ear­lier ICICI Pru­den­tial Long Term Plan) is a dy­namic bond fund that has con­sis­tently de­liv­ered across rate cy­cles.

For in­stance, while the fund made hand­some re­turns of 16-19 per cent in the good years of 2014 and 2016, it man­aged to de­liver 5 per cent re­turns in 2017, a som­bre year for long-term gilt funds that de­liv­ered just 2-3 per cent re­turns. Ac­tively manag­ing du­ra­tion has helped the fund cap losses in volatile mar­kets, while cash­ing in on the ral­lies in good times.

The fund has de­liv­ered an­nual re­turns of 9-10 per cent over longer three-, five- and 10-year pe­ri­ods, beat­ing cat­e­gory per­for­mance by 2-2.5 per­cent­age points. In­vestors with a two- to three-year hori­zon can in­vest in the fund.

Tweak­ing du­ra­tion

Debt fund NAVs rise or fall along with the un­der­ly­ing bond prices. In­ter­est-rate move­ments in the econ­omy im­pact bond prices.

If the in­ter­est rates move up, bond prices fall, and vice versa.

As longer-du­ra­tion bonds are more sen­si­tive to in­ter­est rates, the fund man­ager in­creases du­ra­tion, to cash in on the rally in bonds in a fall­ing-rate sce­nario.

In a ris­ing-rate en­vi­ron­ment, the fund man­ager pares the du­ra­tion of the fund, to cap losses.

ICICI Pru­den­tial All Sea­sons Bond, even in its ear­lier avatar (be­fore un­der­go­ing the name change un­der SEBI’s new cat­e­gori­sa­tion norms) had been tak­ing ac­tive du­ra­tion calls by in­vest­ing pre­dom­i­nantly in G-Secs.

The fund’s av­er­age ma­tu­rity has been vary­ing from four years to as high as 20 years in the past three years. Such ac­tive man­age­ment of du­ra­tion has helped the fund de­liver top-notch re­turns within the cat­e­gory.

After bring­ing down its av­er­age ma­tu­rity to about 1.5-2 years in July-Oc­to­ber 2018, the fund has in­creased it slightly to about 3.5 years in the past two months, which could help it par­tic­i­pate in the in­terim bond rally.

Still, the rel­a­tively lower ma­tu­rity should help cap losses if bond mar­kets turn volatile.

Port­fo­lio

In the past, the fund has in­vested a chunk of its as­sets in G-Secs and high-rated (AA+ and above) bonds. As of De­cem­ber 2018, the fund has in­vested 22.8 per cent in G-Secs and 25.7 per cent in AAA rated debt in­stru­ments.

The scheme car­ries an av­er­age ma­tu­rity of 3.5 years and a yieldto-ma­tu­rity of 8.6 per cent.

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