The Mutual Fund Show: Crisil’s Top-Ranked Debt Funds
Crisil released rankings of mutual funds for the quarter-ended March across categories. In The Mutual Fund Show this week, the ratings and research firm discussed some of the top performers in banking and PSU debt, dynamic bond, medium duration and low-duration funds.
Banking And PSU
The category saw an inflow of Rs 39,426 crore in the last fiscal with assets jumping 65.5% at Rs 1.20 lakh crore as of March. The growth was driven by inflows into safer credit categories since the pandemic. In the last one year, it has also been among the best-performing debt categories, with one-year returns of 7.53%.
DSP Banking and PSU Debt fund maintained its overall top rank in the category. The big mover, however, is the Sundaram Banking and PSU Debt fund, which climbed the charts in overall ranking, moving up from #5 to #2. Its performance is better than the category average in last three months. In fact, the fund returned 0.73% gains during the quarter, the maximum by any scheme in the category. The fund had the lowest modified duration in its peer group, helping its performance.
Dynamic Bond Fund
The category has the lowest assets under management at Rs 27,552 crore. Its assets rose 52% with net inflows of about Rs 8,000 crore in FY21. The category actively manages duration as there is no regulatory constraint on definition. The modified duration of the funds in the category ranged between 1.59 and 5.37 years in the last three years.
IDFC Dynamic Bond Fund maintained the top rank despite underperforming the category average in the last nine months. It was the top performer in the last three years with 9.23% returns compared to the category average of 7.31%. The fund’s duration was the highest among the peers, averaging 5.37 years during the period.
Rising yields in the quarter ended March impacted its performance. But in the three-year period, given the easing cycle in line with fund’s high duration, it outperformed peers.
Medium Duration Funds
Such funds have duration of three or four years based on regulatory definition and take active credit calls to generate returns. The exposure to sub-AAA securities averaged at 40.79% in the last three years as it declined from a maximum of 54.87 % to 28.10% as of March.
The IDFC Medium Duration Fund, with the same attributes as the dynamic bond fund, maintained it leadership position.
The standout mover, however, was the Axis Strategic Bond Fund, which rose from the third to second rank. It posted 5.92% returns in the last nine months against the category’s average of 4.74% and the highest return of 12.55%.
In the last three years, it returned 7.61% gains compared to the category average of 4.84% and the highest 9.12%. The fund has actively managed duration and it fell to the lowest among peers in the three months ended March as yields hardened.
This money-market oriented category attracted inflows of Rs 41,554 over the last fiscal, next only to corporate and short duration categories. The category’s exposure to liquid securities averaged 63.20% over the year, with 15.59% in sovereign and cash equivalents.
Two funds climbed to No. 1 position. Canara Robeco Savings Fud ranked 1 on the portfolio parameters including company concentration, asset quality, liquidity and exposure to sensitive sectors. The scheme had 35% sovereign portfolio in the quarter compared to 21.47% in the category.
LIC MF Savings Fund returned the highest among its peers at 1.22% in the last three months against the category average of 0.72%.
It delivered 7% returns compared to category average of 6.15% and maximum fund return of 7.40% during the quarter ended March. The scheme ranked No. 1 on company concentration and exposure to sensitive sectors. It had no exposure to sensitive sectors.
Watch the full show here:
Here are the edited excerpts from the interview:
We spoke about the rankings last time. How do investors make use of your rankings?
PIYUSH GUPTA: I think when we carry out these rankings, we look at a combination of both performance and portfolio-based factors. In a way, I would say the framework is like a risk-adjusted performance whereby portfolio-based parameters are used from the perspective of measuring risk in the underlying portfolio. When we publish these rankings, it kind of indicates the relative performance of the funds within a category. The idea here is, from the investor perspective of course, the first thing is they need to identify their own asset allocation. You have multiple categories available within mutual funds, starting from equity to liquid funds. So that’s the first step that the investor has to do on his own. Once the asset allocation is determined, then the top-ranking funds, as per the ranking framework that we put out, are something that can be considered by the investors for their investments.
We’ve chosen four categories and let’s start off with the first category, and that’s the ‘Banking and Public Sector Undertaking Funds’. Now, when people are investing in this category of funds, what is it that people should keep in mind?
PIYUSH GUPTA: Before I comment on the category, maybe I can give a brief overview of the framework that we’re using on the debt side because it’s slightly different from equity. So, on the debt side, similar to equity, we look at a combination of performance and portfolio. On the performance side, we look at returns and volatility of the performance. On the portfolio-based attributes, given that we’re looking at debt funds factors like credit quality of the portfolio, interest rate risk in the portfolio, liquidity of the underlying issuers in the portfolio, issuer-level diversification or the concentration risk at the issuer level is something that we look at, and also at the sectoral level we look at the composition of the portfolio and if there are any sectors which are unfavourable in the current market situation, even those aspects are looked at. So, these are the factors that we look at when we carry out these rankings. Now as far as the banking and PSU is concerned, if you look at the SEBI definition also, it says that the funds need to invest a majority of their portfolio into securities which are issued by banks and PSUs. Unlike other categories, this category doesn’t have any restriction in terms of the duration of the underlying portfolio. So, to that extent, I would say the key driver for the performance of this category is the duration management that the funds manage during the course of time. The other thing is, this is a category which is relatively conservative, you have issuers which are from banks and PSUs. So, to that extent the credit quality of this category is relatively more conservative compared to the other categories.
Now let’s talk about some of the funds within this category. Let’s talk about the Sundaram fund maybe because for that fund to do what it has done in the banking and PSU debt fund category; this is at number two and it was a number five the last time.
PIYUSH GUPTA: So, there is a significant improvement in the ranking of this particular fund, compared to the previous quarter and one of the key reasons for this particular fund to improve its ranking is the way the fund’s portfolio has been constructed. Now this particular fund, if we go back in the history, the fund on a consistent basis has maintained a lower duration on its portfolio. Now if you look at the debt market, especially in the last one year, what we will find is, while there has been a decline in the interest rates but in the last quarter, there was a hardening that was evident in the debt market which meant that funds which had a lower duration were better off in terms of generating performance for its investors and which is what worked well for this particular fund which had a lower duration. In fact, it was among the lowest within the peer set which helped it to improve its performance in the recent period. So, that is one factor. This also meant that the fund also outperformed the category over a three-month period. The other thing which went in favour of this fund was, because the fund has been maintaining lower duration, the volatility in its performance has also been lower compared to the other funds which probably would be having a higher duration. When we look at other portfolio-based parameters like exposure to weaker sectors, the fund did not have any exposure which are unfavourable in the current situation. Also, we have interest rate risk as a parameter to measure portfolio risk and because the fund had a lower duration, the fund scores higher on that parameter. So, a combination of all of these factors meant that the fund improved its ranking in the latest quarter.
What went against Tata Banking and PSU Debt Fund because that was at number two and it slipped to number four?
PIYUSH GUPTA: So, it was completely opposite to what happened with Sundaram. This is a fund, Tata Banking and PSU Debt Fund is a fund which has been maintaining a higher duration on its portfolio. This also means that when we look at one-year performance it is still higher than the category average. It is only in the recent quarter, the last quarter when the hardening of yields happened is when the performance slipped. In fact, this fund had a negative return during the last quarter compared to the category average which meant that there was a decline in performance, which also resulted in a decline in rankings. Having said that, the fund scores higher on factors like exposure to sensitive sectors where it doesn’t have any exposure to weaker sectors. Modified duration, again, is where the fund scores lower just because of the style which is higher duration that it has been maintaining over a period of time.
What’s the kind of return profile that people should expect if they are invested in funds in this category under the current scenario?
PIYUSH GUPTA: Even if you look at the performance of this category, if we were to look at all the categories in the last one year, and the last one year has been an exceptional in terms of the overall market scenario. This is a category which has given close to 7.3% in the last one year and I believe it is the second-highest among all the debt categories next to maybe corporate bond funds where the returns were higher than 8%. So, this is a category which has done well, at least in the recent period primarily driven by the interest rate movement which has been favourable for most of the funds under this category. Apart from returns, I would say even from the risk perspective, this is a category which is as I said, slightly conservative in nature in terms of underlying credit profile and the nature of the issuers. So, a conservative investor would be someone who can look at this particular category when he’s opting for debt funds.
What if our investors are looking at the dynamic bond fund category? What is it that they should expect in terms of returns? What is it that they should keep in mind?
PIYUSH GUPTA: The dynamic bond category is a category where there is a lot of flexibility which is available to the fund manager, and primarily from the perspective of duration management. There is no restriction in terms of the duration that the fund can have. They can technically have a duration lower than one or maybe higher than say six or seven in the fund depending on the interest rate view that the fund manager has on the market. Having said that, it kind of also introduces volatility in the performance, it also introduces a possibility of call going wrong by the fund manager because if the fund manager has constructed a portfolio for easing the interest rate scenario and if it doesn’t work out then the returns can actually turn negative for the investor. Hence, from the perspective of risk profile, this has a higher risk element when we look at the interest rate movement over a period of time.
I’m presuming that it is for the set of investors who are open to taking the higher risk for a higher return, kind of a bend so to say in the debt fund category. Would that be a fair assessment?
PIYUSH GUPTA: Yes, within a debt category, this is a category which will probably set slightly higher on the risk scale, primarily because the duration of the funds can be significantly higher and if interest rates were to move in the unfavourable trajectory, then the performance can actually turn negative. Also, it becomes all the more important for the fund manager to get the call on the interest rate right and consistently to deliver consistent returns in this category.
Now I’ve heard various good things about the IDFC Bond Fund Manager, they maintain the number one ranking. Let’s talk about that and then about HDFC which is kind of slipped in the ranks.
PIYUSH GUPTA: IDFC, if you look at their portfolio over the years, they have actively managed duration on their portfolio over a period of time and they have quite often captured the downward movement in interest rate, so as to generate higher returns in their funds. When we look at their three-year performance, it is significantly higher than the category. They have delivered close to 9% while the category average is about 7%. So, in a way they use active duration management as a strategy to manage the dynamic bond fund. Also, when they construct the portfolio, they use government securities to manage duration in the portfolio. So, whenever they want to go higher on duration, they take longer tenor government securities in the portfolio. In a way, the portfolio is devoid or I would say has a relatively lower credit risk and largely it’s the government securities’ investments which are used to manage our duration and generate returns for the investors.
And HDFC doesn’t quite do that?
PIYUSH GUPTA: HDFC in a way, is opposite to the IDFC Bond Fund. In fact, if you look at HDFC’s portfolio, they have been conservative as far as the duration of the portfolio is concerned. They have maintained a lower duration compared to the peer set over a period of time. Further, their allocation to sovereign government securities has also been lower than the category average. So, both of these factors has meant that the ranking of this fund has been lowered. In fact, when we look at their three-year performance, it was 4.74% compared to a category average of 7% and this was primarily because they were conservative in terms of duration. They were maintaining a lower duration of the portfolio and this was at a time when we saw a secular decline in the interest rates especially in the last three years. So, they have not been able to capture the interest rate cycle and hence the performance has also been lower on this particular fund.
Let’s talk about the third category, and again let’s start off with what should one look out for, and what should one expect out of the medium duration funds?
PIYUSH GUPTA: Medium duration funds—if you look at this category, the funds are required to maintain duration within a band of three to four under a specific market condition they can actually go down to one. So, in a way, from a duration perspective it is somewhere in the middle on the overall duration bucket that we have. But what we also have in this category is, the funds also take some bit of credit risk. When we look at funds within this category over the last three years, we have seen quite a few downgrades which have happened in this category and I would say it is also a category which has given among the lowest returns across the debt category. In fact, it is just higher than the credit risk fund when we look at the performance of the last three years. So as an investor, when anyone is looking into this category, they should be aware of the fact that in addition to duration risk which is somewhere in the middle, there is also a credit risk element which comes in, in these funds.
So, what’s the unique selling point of this category, why should somebody choose this category?
PIYUSH GUPTA: This is a category I would say, where you can generate returns where the interest rates are stable. So, when you look at a dynamic bond fund typically if you have the interest rates going down that’s when these categories perform. When you look at shorter duration or money market funds, when there is a slight increase in interest rate, that’s when those funds see a pickup in terms of yield. So, in a scenario where the interest rates are stable and also given that these funds invest into issuers and try to capitalise on the credit risk—in an environment where you see that there are more upgrades than downgrades, then maybe this category can be relevant from the investor perspective. This category tries to generate returns both using duration to some extent and also, the upgrades that may happen in the underlying portfolio.
Let’s talk about Axis because we’ve discussed IDFC’s philosophy already. What about Axis, which has climbed the ranks and is now number two?
PIYUSH GUPTA: Axis Strategic Bond Fund is the fund which is also been active when it comes to maintaining its duration across the timeframe. In fact, over the last three years, the range of duration has been between 1.7 and 3.4, so it’s been active as far as the duration management is concerned and it is also evident when we look at the performance of this fund across timeframes. So, the fund has done well in the latest quarter, as well as over the last three years and it has outperformed the category across the timeframe which has meant that when the interest rates were declining, they were maintaining a relatively higher duration within the band, in which the category is allowed to operate. Even in the recent period when the yields hardened in the last quarter, the fund actually reduced its duration in its portfolio. So that kind of helped the fund to improve its ranking and performance in this particular category.
In low duration funds, what kind of investors should choose this? What is this category all about and what should one watch out for?
PIYUSH GUPTA: Low duration among all the categories that we discussed is the most conservative category, primarily on the two counts. So, from the duration perspective, these are the funds which maintain six to nine months of duration in their portfolio plus the credit quality of these portfolios are also relatively conservative. So, almost 90-95% of the portfolio would be invested into AAA, A1+ or stronger or sovereign paper. So, in a way, from a conservative investor perspective, who doesn’t want to take too much of interest rate risk and also relatively lesser credit risk this is the category which fits in there.
I don’t see funds from the LIC stable really find a mention on leader boards too often, which is why I chose the LIC MF Savings Fund that is number one along with Can Robeco Savings Fund, and it has climbed the ranks of course. What is it that LIC MF has done which has worked right for it?
PIYUSH GUPTA: LIC—if I were to look at this category again from the ranking framework, what you will typically find is, in this shorter duration category the portfolio-based factors play out more than the performance and that’s primarily because the return range in these categories is much narrower compared to the other categories, that is one bit. Second, in terms of portfolio again the objective of these categories is slightly tilted towards portfolio principal protection and hence, we look at portfolio-based parameters more closely and give it a higher weight. So, in the case of LIC MF, when we look at the different factors of course, the fund has improved its ranking on performance, but it would be fair to say that the portfolio-based parameters are the key drivers for its improvement and its performance. When you look at exposure to sensitive sectors, the fund doesn’t have any exposure compared to the peer set which means that the fund ranks one on this particular parameter. Even on the diversification at an issuer level, the fund has a well-diversified portfolio compared to the peer set. Asset quality is also reasonably strong, it has a relatively higher exposure to sovereigns which is T-Bills and equivalent securities compared to the category average. Even from a liquidity perspective, the underlying portfolio is better positioned and is ranked two on the liquidity parameter.
What about Can Robeco because that’s also ranked number one along with LIC. Similar characteristics?
PIYUSH GUPTA: Yeah, the only difference is, in case of LIC, the fund also improved its performance. So, it was ranked one in the performance while in case of Can Robeco, the performance parameters were relatively lower, but when it comes to portfolio quality, the fund scores high just like LIC in all of those factors.
On the flip side, the Aditya Birla Low Duration Fund. That’s kind of slipped the ranks a bit. Can you talk a bit about that?
PIYUSH GUPTA: The fund has seen a decline in its ranking compared to the previous quarter. Again, like I mentioned, while the performance of this fund is good, it doesn’t drive the final ranking, and it’s the portfolio-based parameters which has impacted the overall ranking of this fund. So, for instance, when you look at exposure to sensitive sectors, the fund ranks lower. It has relatively a higher exposure to some of the sectors which are unfavourable in the current scenario and it is higher than the category average. For instance, the fund has 5.97% into sensitive sectors compared to the category average of 2.9%. Further on the asset quality front, the fund scores lower. The fund has relatively lower exposure to sovereign, or G-secs or T-Bills in its portfolio compared to the category. The category has about 30% average, while the fund has only 26%. So, again, when you look at liquidity, given that it has a lower exposure to G-secs and some of the corporate bond issuers are relatively less liquid, the fund also ranks lower on the liquidity parameter. So, these are the four factors I would say which has driven the final ranking of this particular fund.