Franklin India Corporate Debt: Robust returns with moderate risks

The fund is suitable for saving towards long-term goals within a balanced portfolio

With the outlook on interest rates being uncertain, investors may find it challenging to bet on the most suitable type of duration plays among debt funds. Quality corporate bond funds that invest in debt instruments of trusted names while taking active calls on the interest rate scenario may be a safer option for stable returns.

By taking low to moderate risks and yet delivering fairly strong returns consistently, Franklin India Corporate Debt (known as Franklin India Income Builder Account before SEBI’s reclassification) has been among the best schemes, and mostly the top, in the category.

After the SEBI-mandated reclassification of mutual funds, corporate bond schemes are expected to invest at least 80 per cent of their portfolio in instruments rated AA and above. Franklin Corporate invests in a mix of debt avenues, combining instruments with the highest rating (AAA) with those that are a notch lower in the hierarchy (AA), but still have a high degree of credit safety.

The scheme is 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 9.1 per cent annually, placing it on top of the category. It has outperformed peers such as ICICI Prudential Corporate Bond, L&T Triple Ace Bond and BNP Paribas Corporate Bond. Even in the volatile interest rate cycle such as the one witnessed in the last three years, the scheme has delivered a healthy 8.2 per cent.

By generally adopting a somewhat medium duration strategy, Franklin Corporate has been able to ride multiple rate cycles well. The scheme can be a key part of investors’ debt portfolio. Investments in small lump sums can be considered at periodic intervals.

Portfolio and strategy

The fund invests more than 55 per cent of its portfolio in securities with the highest ratings — AAA. About 33 per cent of the assets are invested in AA rated debt instruments. The rest is held as cash or other current assets.

The fund did have a substantially large portfolio with AA and A rated securities a couple of years ago. But it has since trimmed exposures substantially and increased the proportion of AAA rated instruments in its portfolio.

Investments are made in instruments of such corporates as Sikka Ports & Terminals, Apollo Tyres, BPCL, Food Corporation of India and Reliance Broadcast Network.

It also invests in NBFCs and institutions such as PFC, Shriram Transport Finance, Piramal Capital and ICICI Bank.

A portfolio with a blend of AAA rated instruments and those with the next level of rating ensures fairly robust yields for investors.

The portfolio is well-diversified with holdings in 40-50 securities at any point in time.

Franklin Corporate has kept the modified duration of its portfolio to 2-2.5 years over the past three years. By taking a somewhat medium-term duration call, the scheme has been able to shield itself during volatile interest rate cycles.

The fund can be considered as a suitable avenue for saving towards long-term goals within a balanced portfolio.

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