HDFC Short Term Opportunities Fund won the Morningstar award in the Short-Term Bond Fund category. The other two nominees were Aditya BSL Short Term Fund and ICICI Prudential Ultra Short Term Fund.
Anil Bamboli, Senior Fund Manager, Fixed Income, HDFC AMC, discusses the fund's strategy.
What would you attribute the superior performance of HDFC Short Term Opportunities Fund to?
The scheme has adjusted the portfolio duration based on views of interest rates and shape of the yield curve and also picked relatively undervalued credits.
Where do you see interest rates heading in the next fiscal?
Considering the likely impact of upward revision in Minimum Support Price on inflation, improving economic activity, credit growth outpacing deposit growth, fiscal pressures, and rising US bond yields, we expect the yields to rise in the next six months. The Reserve Bank of India may also increase the repo rate by 25-50 basis point in the next 12 months.
How do you see the impact of the expected rate hikes by Federal Reserve on domestic bond markets? How have you positioned your portfolio to minimize this risk?
The markets have priced-in three hikes by Federal Reserve in 2018. So if the market changes its view to more hikes then yields may rise in India also. We have maintained a low portfolio average maturity of around 1.5 years to overcome this risk.
What parameters do you look at while buying a security in this fund?
The fund currently invests mainly in high-quality securities and sticks to less than three-year instruments to deliver consistent returns. The exposure to AAA or equivalent credit rated instruments is normally in excess of 90% of the portfolio. As on 28 February 2018, the exposure to below AAA rated instruments was meagre at 7.5%.
Further, we have a rigorous credit evaluation process beginning with the investment committee approving issuers as acceptable in terms of credit quality to create a "credit list" using internal norms to evaluate each issuer for the creditworthiness. Currently, we have over 250 issuers in our credit list and our funds can take exposure to only the issuers from this list.
The evaluation process considers a number of financial ratios such as leverage, coverage, and solvency ratios while we also look at other parameters including parentage and track record of the issuer. Further, we also have exposure limits applicable for each issuer based on an internal quantitative model in terms of absolute amount as well as percentage of scheme. The list of approved issuers and their exposure limits are reviewed on an ongoing basis.
What would you recommend to investors looking to enter debt funds at this juncture? Which categories of funds look attractive?
Post the sharp fall in 10-year government security, or, G-Sec, yields from a high of 8.78% in July 2014 to 6.47% in July 2017, since Aug 2017 we have been recommending short to medium duration debt funds as they offered superior risk-adjusted returns. Despite the recent sharp rise in 10-year government security yields to 7.73% in Feb 2018, we prefer to maintain a cautious stance for reasons mentioned above.
