Short on time? Listen to a brief overview of this week’s review.
- An income fund
- Follows an accrual strategy
- Remains true to this buy-and-hold approach to top-quality debt
- Does not modify strategy like some peers to chase high yields
- Delivers low-volatile, above-average returns
- Conservative and moderate risk investors with a 3-year perspective
HDFC Medium Term Opportunities is a long-term debt fund. It earns its returns through interest accrued on the bonds it holds. The fund ticks three boxes. One, it holds papers that are of the top credit ratings and does not move into lower-quality instruments. Two, it delivers returns that are better than the average for the category and for lower risk. Three, it remains true to this buy-and-hold top-quality debt approach and does not play around with its portfolio to chase high yields.
The safety, predictability, low volatility packaged with higher returns make HDFC Medium Term Opportunities a good fit for a 3-year and above timeframe. It especially suits conservative and moderate risk investors looking for FD-beating returns without upping the risk by much.
HDFC Medium Term Opportunities (HDFC MT) invests in medium and long-term bonds. In its portfolio, the fund does not take credit risk in payoff for the higher yields these instruments offer. On an average, debt rated AA+ and below formed about 5% of the portfolio since its inception. Where it did move below the AAA set, the fund remained in the AA and AA+ band and not lower. In fact, since April last year, the fund has moved entirely out of these instruments.
Its current portfolio yield-to-maturity at 7.01% is below the income fund average of 7.38%. It’s also well below category toppers DSP BlackRock Income Opportunities, L&T Resurgent India Corporate Bond, or Axis Regular Savings all of which sport YTMs in excess of 8%. However, these funds also have a third to half their portfolio in securities rated below AAA, making their risk profile very different.
HDFC MT has still managed to keep its returns above the average for the category. It uses trading opportunities on its AAA-rated bonds to enhance returns. In falling rate cycles, it invests a small portion of its portfolio in government bonds to gain from bond price rallies and thus shore up returns.
HDFC MT is among the lowest volatile income funds. Along with this, its risk-adjusted return is among the highest above even those that do take credit risk. Its average rolling 3-year return over 5 years at 9.4% is well above the category’s 8.5%. Even its worst return of 7.6% in this period was well above almost all peers. There is no one-year or even 6-month period since its inception that the fund has delivered a loss. Other funds with high credit quality portfolios, such as IDFC SSIF – Medium Term have not matched HDFC MT’s ability to deliver above-average returns or high risk-adjusted returns.
HDFC MT holds 75% of its portfolio in AAA-rated corporate bonds. Issuers represent a mix of PSUs such as PFC and Power Grid as well as private sector players such as Bajaj Finance and M&M Financial Services. It holds no paper rated below AAA.
A fifth of the portfolio is in state development loans, which at 7.9% – 8.7% are backed by government and come with good yields. The fund hasn’t gone for very long-term bonds, with maturities of less than five years and even 1-2 years in some cases. Its average maturity is therefore not very high at 2.8 years, leaving it with the room to adjust the portfolio to rate changes in the coming quarters.
HDFC MT is unlikely to provide chart-topping returns, especially now with peer funds holding higher-yielding instruments. However, for those looking for returns superior to long-term fixed deposits or a portfolio diversification from high-risk equity, a low-volatile fund is preferable. The fund is also better than dynamic bond funds for conservative investors, owing to the higher volatility inherent in dynamic bond funds.
HDFC MT’s added advantage is that it has not modified its strategy to look for higher returns. With debt funds changing colour based on market conditions as we pointed out last week, the ability to rely on this fund’s low-risk strategy is a positive. The fund has an AUM of Rs 12,150 crore. Anupam Joshi is the fund’s manager.
FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis for investment decisions. To know how to read our weekly fund reviews, please click here.