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Deciding on a suitable duration play based on the prevailing interest-rate scenario may be challenging for most retail investors. In this regard, select corporate bond funds that invest in high-quality debt instruments may be suitable.
By taking low risks and yet delivering reasonably solid returns consistently, Kotak Corporate Bond Fund has been among the best schemes in the category.
Strong ‘bond’
After the SEBI-mandated reclassification of mutual funds, corporate bond schemes are expected to invest at least 80 per cent of their portfolio in corporate bonds rated AA+ and above.
Kotak Corporate goes a step further and restricts itself almost entirely to debt avenues with the highest ratings, making it suitable for investors with a modest risk appetite looking for superior returns to bank deposits.
In the past five years, the scheme has delivered a healthy 8.8 per cent annually, placing it among the top three funds in the category. Kotak Corporate has outperformed peers such as ICICI Pru Corporate Bond, L&T Triple Ace Bond and BNP Paribas Corporate Bond.
By generally adopting a short-duration strategy, the fund has been able to ride multiple rate cycles well. The scheme can be a key part of investors’ debt portfolio.
Informed investors can opt for the direct plan as costs are lower (0.31 per cent) than the regular plan (0.58 per cent) and will add to the fund’s returns over the long term. You can consider investments in small lump sums at periodic intervals.
Kotak Corporate invests more than 90 per cent of its portfolio in securities with the highest ratings – AAA and A1+.
The rest is held as cash or invested in avenues such as term deposits and reverse repo. A couple of years ago, the fund invested 5-8 per cent of its portfolio in debt instruments rated AA, but has since exited from such exposure.
Some of the prominent holdings of Kotak Corporate include debentures, certificates of deposits, zero coupon bonds, pass-through certificates (PTCs) and corporate debts. Investments are made in instruments of corporates such as Reliance Retail, Reliance Industries, Mahindra & Mahindra Financial Services, Power Finance Corporation, and Piramal Capital & Housing Finance.
It also invests in such avenues as the SP Jammu Udhampur Highway (backed by unconditional and irrevocable guarantee of Shapoorji Pallonji & Co), which opens the potential for robust returns, given that the route has fairly heavy traffic movement. The portfolio is well-diversified with holdings in 30-35 securities at any point in time.
Kotak Corporate has reduced the modified duration of its portfolio from a little less than two years to under a year in the past three years.
This move has ensured that the fund gains despite adverse interest-rate movements.
The fund is a suitable avenue for saving towards long-term goals within a balanced portfolio.
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