Fund Call: HDFC Regular Savings Fund: Over 16 and going strong - Buy

The fund has been a steady performer during market ups and downs

Tightening of global liquidity and worries over the inflation and fiscal slippages on the domestic front have impacted bond markets over the past year.

After cutting its key policy rate once in August 2017, the RBI has been in a long pause. In its latest February policy, the RBI chose to hold rates, lending comfort to the jittery bond markets that have already been factoring in reversal of rate easing cycle.

While the RBI maintaining status quo this time around has been a positive, rate hikes are imminent. Hence, conservative investors unwilling to take interest rate risk should consider short-term income funds.

Short-term income funds invest in debt securities that mature up to 3-4 years. Their portfolios usually have a small allocation to long-term gilts and higher allocation to medium-tenure, corporate bonds. Within the category, HDFC Regular Savings has been a consistent performer across rate cycles.

Since its inception in 2002, the fund has delivered an annual return of about 8 per cent. Over most of its 16-year track record, it has given steady, category-beating, returns. Investors eyeing a time period of 2-3 years could consider investing in this fund.

Impressive showing

Over five, seven and 10 years, HDFC Regular Savings Fund has delivered an annual return of 8.8-8.9 per cent, across various rate cycles. Shorter maturity bonds, which are less sensitive to interest rates, can cap losses well in volatile markets. In the lacklustre market of 2013 and 2015, HDFC Regular Savings still managed to deliver a healthy 7-9 per cent return, when long-term gilt funds delivered 3-6 per cent return.

In the lacklustre market of 2013 and 2015, HDFC Regular Savings still managed to deliver a healthy 7-9 per cent return, when long-term gilt funds delivered 3-6 per cent return.

 

 

More recently in 2017, as rates inched up sharply, long-term gilt funds delivered a muted 2-odd per cent while short-term income funds such as HDFC Regular Savings raked in a higher 6-7 per cent return.

For the conservative

But while shorter duration bonds gain when markets are volatile, they may also fail to deliver spectacular returns, in a falling rate cycle.

In the bond market rally of 2014 or 2016, for instance, short-term bond funds underperformed long-term gilt funds that sported robust 16-17 per cent returns.

But for conservative investors, the 10-11 per cent return delivered by HDFC Regular Savings during these periods is nonetheless rewarding.

Given the uncertainty around rates now, the fund, given its lower duration, is no doubt a better bet than long-term gilt funds.

The fund currently has average maturity of 1.8 years and yield to maturity of 8.6 per cent. Its maturity has predominantly been in the range of 1.5-2 years in the past.

Top holdings

The fund currently has 27 per cent in AAA rated bonds, 54 per cent in AA rated bonds and 12 per cent in A rated debt instruments.

Vedanta, HDFC, LIC Housing Finance, Adani Transmission and HPCL-Mittal Energy are some of the fund’s top holdings.

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