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Volatility is back to haunt bond markets. Over the past month, yield on 10-year government securities have shot up by 40-50 basis points, leaving bond investors in a flux.
A weaker rupee, surge in crude prices and sticky core inflation are once again hinting at possible rate hikes by the RBI this year.
If you are a conservative investor and do not wish to take interest-rate risk, you could invest in HDFC Short Term Opportunities Fund which runs an average maturity of 1.5-1.7 years, thus mitigating interest-rate risk.
The fund has delivered 8.6 per cent annualised return since its inception in 2010.
It has delivered 7.8 per cent and 8.3 per cent returns over three- and five-year periods, respectively.
Rate risks
While bond markets did see some relief towards the end of March, thanks to the Centre lowering the borrowing programme for the first half of 2018-19 and the RBI’s sanguine inflation outlook, the party was short-lived.
Surge in crude prices, the calendar of market borrowings by State governments implying a sharp rise in gross issuance and sticky core inflation have kept bond markets on tenterhooks.
From about 7.2 per cent, yield on government bonds have shot up to 7.7 per cent levels.
In a recent brief relief to bond markets, the RBI surprised all with plans to buy ₹10,000 crore of government bonds via open-market operations (OMOs).
While the yield on G-Sec has come off slightly, underlying risks persist, which could continue to exert pressure on yields.
Hence, investors wary of interest-rate risk should go for short-term debt funds that tide over volatility in rates.
Good track record
HDFC Short 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 9.3 per cent return.
It managed to deliver 8.7 per cent return in 2015 as well — a lacklustre year for most gilt funds that delivered 4-5 per cent returns.
The year 2017 was tepid 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.
The fund predominately invests in higher-rated (AAA-rated) bonds, forming around 70 per cent of its portfolio in recent times.
Given the fund’s lower-risk portfolio, its yield-to-maturity of 7.65 per cent is healthy.
SEBI’s new norms
Following SEBI’s circular on categorisation and rationalisation of mutual funds, the fund will be renamed HDFC Short Term Debt Fund with effect from May 16.
Slotted into the Short Duration Fund category laid down by SEBI, the fund will have to invest in debt and money-market instruments such that the duration (Macaulay) of the portfolio is 1-3 years.
Given that the primary focus of the fund earlier also was to invest in debt and money-market instruments and government bonds with maturities not exceeding 36 months, not much changes with the new positioning.
The benchmark of the fund also remains the same — CRISIL Short Term Bond Fund Index.
As per the new mandate, the fund can invest up to 100 per cent in debt and money-market instruments which will not entail any major change in the portfolio.
However, the fund will have to strictly stick to the SEBI’s laid-down duration (Macaulay) mandate of 1-3 years.
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