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Given the uncertainties regarding the trajectory of interest rates, deciding on duration funds may be a challenging task for retail investors. The increase in interest rates by the RBI earlier this year had caused long-duration funds to go off investors’ radar. However, select medium-duration funds that take moderate risks have become attractive. These funds are relatively less affected than long-duration ones, when rates change.
SBI Magnum Medium Duration (SBI Medium), earlier known as SBI Regular Savings, is one such quality fund that has delivered solid returns and juggled the maturity profile and the yields of its portfolio deftly. Its top holdings are in securities that have the highest ratings, ‘AAA’. Instruments with reasonable ratings (AA, A, etc.) are also part of its portfolio, though such investments are in large conglomerates or quality corporates.
Over the last five years, SBI Medium has delivered almost 10 per cent annually, making it the best fund in the category. Over one-, three- and five-year periods, the scheme has outperformed the category average and peers such as HDFC Medium Term, ABSL Medium Term Plan and ICICI Pru Medium Term Bond.
In general, the SIP route is not recommended for investing in debt funds, given that the cost averaging may not be significant for such schemes. Investors can buy small lump sums at periodic intervals.
As a scheme that manages durations actively, SBI Medium has generally juggled the maturity profile and the yields of its portfolio well. Over the past year, as rates hardened, the fund has reduced its modified duration from 3.1 years in November 2017 to about 2.3 years currently.
The yield-to-maturity is healthy at 9.4 per cent. Given the scheme’s excellent track record over the past 10 years, it is reasonable to assume that it has deftly handled multiple rate cycles.
Portfolio
The top holdings of the fund are mostly AAA rated, consisting of NCDs (non-convertible debentures) from financial institutions such as SBI, REC, HDFC Credila Financial Services and Indiabulls Housing Finance. When SBI Medium invests in AA or A rated instruments, it is usually in names with a solid corporate backing such as Aditya Birla Retail, PuneSolapur Expressways and Tata Power Renewable Energy. Zero coupon bonds, reverse repo and government securities are some of the investment avenues for the scheme. Around 40 per cent of SBI Medium’s holdings are in instruments rated AAA or are sovereign. The other holdings, apart from cash, still have pretty high ratings and low default risks.
The scheme does not get into instruments with ratings lower than A. SBI Medium will be a good bet for goals that are, say, two or three years away and can be a part of the debt portfolio of an investor who can take moderate risks. It can also be a reasonable long-term investment.
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