FundsIndia Strategies: Funds for risk-taking debt investors

May 28, 2013 . Vidya Bala

Early this month, we carried an article on whether you should invest in gilt funds or not:
Should you invest in gilt funds? In the same article, we had suggested that the gilt rally may have limited upside in the course of the next one year, concluding that high-risk investors looking for active debt exposure should probably look at long-dated income fund portfolios which have higher exposure to corporate bonds and debentures and even state development loans.

While we sifted through income funds, we came across some such interesting portfolios held by funds such as Birla Income Plus, SBI Income Fund and SBI Dynamic Bond. Funds that had good exposure to corporate bonds but almost a 50% exposure to gilt funds were Templeton India Income Builder and Reliance Dynamic Bond. Here’s a quick review on these funds.
debt returns

The funds mentioned above are suitable only if you are looking to maximize the benefit from the interest rate fall over the course of the next one year. The time frame for holding these funds would be about a year.

In other words, these funds are meant for more tactical holding. You would have to be an active debt investor who can exit the fund once you see interest rate falls approaching an end. The funds would also require relatively higher risk appetite.

We would not recommend these funds for an investor’s core portfolio, especially for those with a long-term horizon. Why is this so? Over a longer term, many other income funds, such as Birla Dynamic Bond or IDFC SSI Medium Term score better on a risk-adjusted basis. That means you can hope to earn well with lower risks in the long term.

We scouted for funds that have a long average maturity with a high exposure to corporate bonds or state loans rather than G-Secs. This choice was done to take advantage of rallies in corporate bonds as the spread between corporate bonds and gilts narrow with falling interest rates.
A long track record of reasonable returns and majority holding in AAA-rated instruments were other key criterions used to select the funds.

Portfolio and returns
In the last 2 years, the funds mentioned above delivered high double-digit returns, aided by rally both in the G-Sec and corporate bond segments. Their dynamic shift across various tenures, in line with interest rate movements helped these funds deliver superior returns.

But our analysis suggests that other income funds with lower average portfolio maturity have fared well over a three-year period on a risk-adjusted basis. For instance, Birla Sun Life Dynamic Bond fund’s sharpe ratio (for a period of 3 years) was better than Birla Sun Life Income Plus. Templeton India Income Opportunities, similarly, outperformed Templeton India Income Builder on the same parameter.

It is for this reason of high risk not compensated by high returns in the long term that some of these funds would not receive high fund rating in portals such as Value Research Online.

In the accompanying table, while the SBI funds have a good proportion exposed to private and public sector bonds, Birla Sun Life Income Plus’ portfolio has a good dose of state development loans. They provide better scope for a price rally when compared with Central government bonds. But they are not risk free. State development loan repayments are monitored by the RBI. Yet, if a state’s financial condition is shaky, then such an instrument will carry higher risk.


For those preferring to take exposure to Central government securities than state-run ones, Templeton India Income Builder and Reliance Dynamic Bond may offer a good dose of government securities, even as they invest a reasonable proportion in corporate bonds.

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