AnilBamboli

3 reasons why this NFO makes sense now

Anil Bamboli

Senior Fund Manager – Fixed Income

HDFC Mutual Fund

Anil lists 3 reasons why the new HDFC Ultra Short Term Fund is a sensible option now:

  • Attractive absolute yields in the 3 mth – 1 yr bucket due to macro factors
  • Spreads between CDs and repo rate now near 3 yr high
  • Steepness of yield curve can give faster roll down benefits

Click here to view fund presentation of HDFC Ultra Short Term Fund

WF: How do you explain the timing of this fund offer, given the current macro-economic scenario of liquidity tightening, higher CAD, volatile currency rates?

Anil: Over the past few months, we have seen many events that has impacted the bond yields. System liquidity has tightened due to high currency withdrawal, higher credit growth and RBI forex intervention. Current Account Deficit has deteriorated owing to rise in crude oil prices and strengthening Dollar & high US yields has adversely impacted capital flows. All these events have led to sharp rise in yields. Further, absolute yields have become attractive in the 3 months to 1year bucket (refer Chart 1) and spread between CDs and Repo are near 3 year highs (refer Chart 2). Also, steep yield curve is likely to give faster roll down benefits. Thus, we believe this is the apt time to launch this fund.

Attractive yields upto one year (Chart 1)

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Source: Reuters, FBIL

High Term Spreads - Spread between CDs and Repo are near 3 year highs (Chart 2)

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Source: Reuters, FBIL

WF: What will be the key investment strategy for this fund?

Anil: The fund is positioned in the Ultra Short Duration Category. Depending upon the interest rate outlook, the fund manager will manage Macaulay duration between 3 months to 6 months. Currently, the fund shall focus on maintaining superior credit quality and optimize returns while maintaining a balance of Liquidity, Safety and Return.

WF: How should distributors and investors distinguish between ultra short term category, short term and low duration categories? How should one determine suitability between these three for investors?

Anil: Post the SEBI directive on Categorization and Rationalization of Mutual Fund Schemes, debt mutual funds are positioned based on either Macaulay duration of the portfolio or based on a theme. Ultra Short Duration funds have Macaulay duration of the portfolio between 3 – 6 months and are suitable for investors with 2-6 months investment horizon. These funds aim to provide a higher carry than liquid funds. Low duration takes a slightly higher duration exposure. The Macaulay duration of the portfolio can be between 6 – 12 months. So, the interest rate risk will be slightly higher. Short Duration funds have a Macaulay duration between 1 – 3 year. So, as the duration of the portfolio increases, interest rate risk also increases. Thus, investors should consider investing in these funds based on their own risk appetite, liquidity requirements and investment horizon.

WF: What are indicative yields on papers that you are considering for the initial portfolio of the fund? What is likely to be the gross and net yield of the initial portfolio?

Anil: Given the prevailing yields in the target segment, suffices to say that the product offers decent investment opportunity and the Yield to Maturity of this fund is likely to be higher than liquid funds.

WF: What is your view on RBI’s stance on interest rates and liquidity? How do you think it will impact the fund?

Anil: The Monetary Policy Committee (MPC) minutes released for its meeting held in August 2018 were in line with expectations and reinforced the view that next rate hike will be data dependent. However, we prefer to maintain a cautious stance due to the likely impact of INR depreciation, high crude oil prices, upward revision in MSPs on inflation, credit growth outpacing deposit growth and elevated US bond yields. In our opinion, the front end of the yield curve offers better risk adjusted return than the longer end and hence, we continue to recommend investment in short to medium duration debt funds. Thus, we believe investors can consider investing this fund as it is positioned on the shorter end of the yield curve.

WF: What are the key challenges that could impact the fund over the next 6-12 months? How do you plan to manage these challenges?

Anil: INR depreciation, high crude oil prices, higher inflation, credit growth outpacing deposit growth and elevated US bond yields may lead to volatility in yields. However, this fund will be largely immune to such volatility as the fund is positioned on the shorter end of the yield curve with Macaulay duration between 3 months to 6 months.

Click here to view fund presentation of HDFC Ultra Short Term Fund

Views expressed herein are based on internal data, publicly available information and other sources believed to be reliable, but involve uncertainties that could cause actual events to differ materially from those expressed or implied in such statements. The document is given for general and information purpose and is neither an investment advice nor an offer to sell nor a solicitation. The readers before acting on any information herein should make their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY

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