A ready-made debt fund basket
The last few years have demonstrated that the Indian debt market has become more volatile and less predictable. Return opportunities of course, have risen along with the higher risks that many of these instruments now carry.
In such a scenario, you have two options if you wish to invest in a debt fund for wealth building: one, you may choose to simply hold medium-to-long-term income funds and not try to follow a cycle; two, try and ride the interest rate cycle with the right choice of funds that suit each cycle.
Now, the latter is more difficult and requires constant review and churn of your portfolio. It is for those who go with the second choice, that fund-of-funds such as ING Active Debt Multi-Manager FoF (ING Active Debt) may seem useful.
With a return of 9.4% annually in the last 3 years and 12.8% in the last 1 year, ING Active Debt has been in the top quartile of the performance chart of income funds.
ING Active Debt is a fund-of-fund. But unlike a number of FoFs that invest in schemes from their own stable, ING Active Debt invests purely in third-party debt mutual funds (schemes from other AMCs). That means it has the option to pick the best in the industry rather than stick to what it has in house.
The fund invests in a combination of income, gilt, short-term, and liquid funds, the proportion of which is churned in line with changing interest rate scenarios. The fund will be treated like any other debt fund for capital gains tax purpose.
ING Active Debt, as stated earlier, is suitable for investors wanting to hold a basket of funds and gain from interest rate movements with a time frame of at least 3 years. The fund is not suitable for investors looking to park short-term money as it does not have the characteristics of a liquid or ultra-short-term fund.
The advantage of holding ING Active Debt, over holding individual funds is that if you were to build your own basket of funds and actively churn your portfolio, you would incur capital gains tax. You may also face exit load if you hold for the short term.
A FoF will not incur capital gains tax when it churns, as rebalancing of underlying funds in a FoF portfolio does not suffer capital gains tax. Besides, you would also have an expert choosing the funds for you and also dynamically altering the allocation to suit interest rate cycles.
ING Active Debt delivered 8.4% annually since its inception beginning 2007; comfortably beating its benchmark – CRISIL Composite Bond Fund index return of 6.5%. Income funds on an average delivered 7% over the same period.
But ING Active Debt has had its roller-coaster ride as well. On a rolling one-year return basis over the last five years, the fund managed to beat its benchmark only 62% of the times.
That is not the mark of great consistency. But to its credit, it did not fall in to the negative turf, unlike some gilt/income funds that took long-dated calls in late 2008 and early 2009.
The fund fell about 1.2% from May 22, the day when debt markets started their descent. Higher exposure to long-dated income funds as well as gilt funds led to the decline post the hawkish stance by the US Federal Reserve.
While this fall is not insignificant, it is still better than the decline seen in funds such as SBI Dynamic Bond and Reliance Dynamic Bond.
Some of the top holdings as of May included IDFC Dynamic Bond, ICICI Pru Income Opportunities, ICICI Pru Gilt and Kotak Gilt. The fund had increased its exposure to gilt funds to 58% as of May. However, post the fall in June (June portfolio was not available when this article was written), it reduced exposure to this space to 48%. It increased liquid instruments to about 7%.
One advantage that ING Active Debt holds in managing its portfolio is the ease with which it can navigate across different tenures. For instance, in the above mentioned case, the fund quickly reduced its exposure to gilt funds.
However, an individual gilt fund or an income fund may find it more difficult to quickly sell a long-dated paper and adjust the portfolio maturity, especially when the market is tanking.
The fund is managed by Shravan Kumar Srinivasula.
Note that we do not at present have a call on this fund.