HDFC Medium Term Opportunities Fund: Consistent returns across rate cycles

The fund invests mainly in highly rated instruments, which lowers its credit risk

The sudden spike in bond yields over the past three months by about 70 basis points has rattled investors. With inflation inching up and concerns over fiscal slippages taking centre stage, bond yields can remain within a narrow range with an upward bias.

If you are a conservative investor and do not wish to take interest rate risk, you could invest in HDFC Medium Term Opportunities Fund, which runs an average maturity of 1.5-3.5 years. The primary focus of this fund is to get returns through investments in debt and money market instruments and government bonds, with maturities not exceeding 60 months.

 

 

The fund has delivered 8.9 per cent annualised return since its inception in 2010. It has delivered 8.3 per cent and 8.7 per cent return over three- and five-year periods.

Interest rate risk

The RBI cut rates only once in 2017— in August by 25 basis points. With inflation inching up, it has settled for a long pause. Given that the RBI has been rigid on its 4 per cent medium-term target, rate cuts seem out of the picture for now.

Some of this has already been factored into the yields, which have moved up notably in the past two months.

There are also concerns on the Centre meeting its fiscal deficit target. All of this indicates that investors should avoid betting on ‘duration’ to ward off interest rate risk. Short-term income funds such as HDFC Medium Term Opportunities Fund that carry less volatility in returns just about the fit bill.

Good track record

HDFC Medium Term Opportunities Fund has delivered consistent returns across all rate cycles. In 2016, for instance, a good year for bond markets, the fund delivered a healthy 10.6 per cent return. It managed to deliver 8.6 per cent return in 2015 as well — a lacklustre year for most gilt funds that delivered 4-5 per cent returns. 2017 was a tepid year for bond markets, when top long-term gilt funds managed to deliver just 5-6 per cent return. The fund too delivered a lower 6.5 per cent return, but managed to beat category returns by a little over a percentage point.

While the fund’s interest rate risk is kept at bay given its low maturity of 1.5-3.5 years, credit risk is also well managed. The fund predominately invests in higher rated bonds (AAA rated) and government securities. This lowers its credit risk.

The fund holds 76 per cent in AAA rated bonds and 19 per cent in government bonds. HDFC Ltd, Power Finance Corporation, LIC Housing Finance and Bajaj Finance are some of its top holdings within corporate bonds.

Given the fund’s lower risk portfolio, its yield-to-maturity of 7.7 per cent is healthy.

It has a current average maturity of 2.7 years.

 

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