Premium: A Select List of Higher Duration Bond Funds

We’ve decided to start looking at longer term bond funds, as bond yields start to go up when FIIs have hit their limit. In fact RBI has said they aren’t considering raising limits, which means the buyers for these securities may not get any respite. FIIs are allowed $20 billion (but at a conversion rate of around Rs. 50 to a dollar, which is around 100,000 cr.) and they’ve bought all of it.

We also think the impression of inflation softening will be visible later this year, and we will forget that this is only because of the base effect.

In that context for the first time in many years, we would consider moving from the short-term to the medium or long term. We would like to look at certain bond funds that have a duration of 3 to 7 years.

Technical note: Duration is a portfolio measure which is the weighted average years to maturity of all cash flows in that portfolio. Modified Duration is a measure of how sensitive the price of a portfolio is to a yield change. This tells you how sensitive the portfolio is to yield changes. However, it looks like what Indian funds tell you is a measure in years, which doesn’t seem to be the “modified” duration, but just “duration”.

Our filters were:

• Fund should have 1,000 cr. at least as AUM

• Fund should have a (modified) duration of 3 to 8.

• Manageable exit load

We’ve narrowed down to a list of three:

Fund

Assets (Cr.)

Duration (yrs)

3-month

1-yr

3-yr

Exit Load

Birla SL Dynamic Bond

11008

4.98

4.83%

7.58%

9.94%

0.5%/180d

DSP BlackRock Strategic Bond

1984

3.7

4.65%

7.03%

9.35%

0.1%/7d

Reliance Dynamic Bond

5823

5.06

5.00%

4.42%

9.63%

1%/180d

We had to ditch a few funds like Templeton corporate bond fund for having much higher loads (upto three years). All research was conducted on Value Research Online.

We will, in our own debt allocation, start to put a little money at a time into the first two funds. The third one’s a backup.

Why only two funds? Why do you need more? If you look at the portfolio, they all seem to own the same kind or similar securities. One would be great if you trusted the fund manager enough, but two is just right for us.

We’re using the Direct Plan which gives us between 0.3% to 0.5% more per year.

The funds should be in for at least 6 months each, and we expect to finish our allocation within eight months, so we’re planning to do 1/8th of our allocation each month.

The risks remain that inflation will go up (which will push up yields and thus, prices will fall). The other risk is that worldwide, interest rates will spike up, which can happen at anytime because everyone’s complacent!

This is not an investment in a hurry; yields are only at 8.54% right now, which is still near the low. As yields go up, higher duration funds become more attractive as a medium term investment.

Note: this is not advice. We hope that this will help you understand how to build your portfolio, and you might use different considerations to select your funds.

Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.