Credit Opportunities funds, sometimes also known as corporate bond funds, are similar to short term debt funds. While short term debt funds are good investment options over a one to two years investment horizon for conservative investors with little or no interest rate risk, credit opportunities funds lock in a few percentage points of additional yield, again with limited interest rate risk, by investing in slightly lower rated corporate bonds. As such, investors looking for slightly higher returns over a two to three year period can consider credit opportunities funds. Reliance Corporate Bond Fund, a credit opportunities fund, has given nearly double digits, 9.8% returns, since the NFO of the fund nearly 20 months back in 2014. Despite the slightly lower credit rating of the bonds in the credit opportunities fund portfolio compared to a say a short term debt fund portfolio, the overall credit quality of good credit opportunities funds is quite high. In fact, Securities Exchange Board of India has been reviewing and tightening norms of investment in corporate bonds by mutual funds since August 2015, when a particular Asset Management Company (not Reliance Mutual Fund) faced some issues with respect to downgrade of a corporate bond in its portfolio. Reliance Corporate Bond Fund has not been impacted by ratings downgrades that have affected some other debt funds in the past 7 to 8 months. 96% of the fund’s bond portfolio is rated AA and above (with over 84% of the portfolio rated AAA, denoting highest safety). In the last one year, the fund has given 8.1% trailing annualized returns and has beaten the benchmark CRISIL Composite bond index by a comfortable margin.
Reliance Corporate Bond Fund Overview
The scheme was launched in June 2014 and has an AUM of nearly
र 1,230 crores. The expense ratio of the fund is 1.58%. The minimum investment in this scheme is र 5,000. Prashant Rimple and Jahnvee Shah are the fund managers of this scheme. In addition to the usual growth and annual dividend options, the scheme also has quarterly dividend option and bonus options.
To understand the risk return characteristics of Reliance Corporate Bond Fund, let us quickly recap two debt fund investment strategies that we have discussed several times earlier in our debt fund blogs.
Debt fund managers employ two different kinds of investment strategy:-
Hold till Maturity: This is also known as accrual strategy, by which the fund invests in certain types of fixed income securities (or bonds) and hold them till maturity of the bond, earning the interest offered by the bond over the maturity period.
Duration Calls: Using this strategy the fund manager, takes a view on the trajectory of interest rates. Bond prices go up when interest rate falls and declines when interest rate goes up. When interest increases duration call strategy will give a lower return, and when they decrease the same strategy will give higher returns.
Let us understand the risks involved with debt investments. There are, primarily, two kinds of risks associated with debt funds:-
Yield to Maturity Reliance Corporate Bond Fund
Yield to maturity (YTM) is the return which the debt fund will get by holding the securities in its portfolio to maturity. The YTM of the fund portfolio is 10% and the modified duration is 3 years. This implies that if there are no changes to the fund portfolio, it can give a return of 10% over the next years before expenses. Investors investing in credit opportunities funds should try to match their investment horizon with the modified duration of the fund portfolio. If there is a big mismatch between the investment horizon of the investor and the modified duration of the fund portfolio, then the return expectation of the investor may not be met.
Outlook for the fund over the next 2 to 3 years
We have discussed a number of factors that will affect debt fund returns over the next year or so in our blog post, What debt mutual fund investors should do in 2016. Overall, many economists and global rating agencies expect the macros of our economy to improve in the next fiscal year and going forward, the current global and domestic risks notwithstanding. Reliance Corporate Bond Fund will benefit from its portfolio strategy and improvement in macro-economic fundamentals in three ways:-
- The high accrual income of the fund, as indicated by the 10% YTM, will enable investors to earn income over the investment horizon.
- When bond yields and interest rates decline, Reliance Corporate Bond Fund investors will benefit by the way of the capital appreciation of the bonds in the fund’s portfolio. When bond yields and interest rates decline bond prices go up. If interest rate goes down by 1%, the returns of the fund may go up by as much as 3%, since the modified duration of the fund portfolio is 3 years. Modified duration measures the sensitivity of a fund to interest rate movements. If the modified duration of a bond is 1, it means that if there is a 1% decrease in interest rates the price of the bond will go up by 1%, over and above the interest paid by the bond.
- As the macro-economic environment improves, some lower rated bonds in the fund’s portfolio may get upgraded. When bonds get upgraded their price goes up, leading to further capital appreciation.
Dividend Pay-out Track Record of Reliance Corporate Bond Fund
Though it has been less than two years since the launch of Reliance Corporate Bond Fund, the fund has had a good quarterly dividend pay-out track record, as shown in the table below.
Reliance Corporate Bond Fund is a good investment option for conservative investors over a 2 to 3 years investment horizon. In light of the recent SEBI norms, investors should monitor the developments in the debt fund space and consult with their financial advisors if Reliance Corporate Bond Fund is best suited for their short and medium term investment needs.