Mutual Funds

Aditya Birla Sun Life Corporate Bond Fund: For those wary of credit and rate risk

Radhika Merwin | Updated on June 06, 2018 Published on June 03, 2018

In a rising rate scenario, the fund’s lower maturity can help cap losses

If you are a conservative investor wary of interest-rate risk and also like to play it safe with credit ratings of the underlying bonds, funds under SEBI’s newly set out ‘Corporate Bond Fund’ category can offer just the solution.

These funds, as mandated by SEBI, need to invest at least 80 per cent in highest-rated debt instruments, lowering the credit risk.

Aditya Birla Sun Life Corporate Bond Fund (erstwhile Aditya Birla Sun Life Short Term) has delivered healthy returns across rate cycles.

The fund has mostly invested in high-rated bonds in the past. Hence, the latest re-jig in category post SEBI’s directive on categorisation and rationalisation, will not lead to any substantial changes in the fund’s portfolio.

Over the past three-, five- and seven-year periods, the fund has delivered annualised returns of 7.8, 8.4 and 9 per cent, respectively.

Since its launch in 1997, the fund has delivered an annualised return of 9.3 per cent. Investors with 2-3 years of time horizon can invest in the fund.

Portfolio mix

As per the fund’s newly laid down mandate, it will predominantly invest in AA+- and above-rated corporate bonds. Over the past two years, it has been investing 65-75 per cent of its assets in AA+- and above-rated bonds. Hence, there is unlikely to be any significant changes in the portfolio post the rejig in categorisation.

The fund’s yield to maturity of 8.1 per cent (as of April 2018) is healthy, considering its low exposure to more risky bonds.

Remember, higher the risk, higher the interest rate the bond offers.

Interest-rate movements in the economy impact bond prices. If the interest rates move up, bond prices fall and vice versa. Hence, in a rising rate cycle such as now, longer duration bonds that are more sensitive to interest rates get impacted the most.

The yield on 10-year government bonds have shot up from a low of 7.1 per cent in April to 7.8 per cent now, on the back of worries over falling rupee, and possible rate hikes by the RBI due to surge in crude prices and sticky core inflation.

Hence, short-term debt funds such as Aditya Birla Sun Life Corporate Bond, that have a lower maturity, can help cap losses. The fund is suitable for investors who are wary of taking duration calls at this juncture.

The fund has maintained its average maturity at two-three years in the past.

Sound track record

Aditya Birla Sun Life Corporate Bond has been a consistent performer. In the 2014 bond rally, the fund delivered nearly 11 per cent returns. It also managed to put up a good show in 2015, when the yield on government bonds remained stubbornly high even as the RBI slashed its key policy rate by 125 basis points. While gilt funds (long duration) delivered a modest 4-5 per cent returns in 2015, Aditya Birla Sun Life Corporate Bond managed a near 9 per cent return. In 2017, a tepid year for bond markets, the fund delivered a lower 6.5 per cent return, beating the category average nonetheless.

Top holdings of the fund include high-rated (AAA) bonds of Power Finance Corporation, Housing Development Finance Corporation, Rural Electrification Corporation and Nabard.

The fund’s exposure to AA-rated bonds also include sound names such as Shriram Transport Finance Company and Vodafone Mobile Services.

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