The Securities and Exchange Board of India had come out with a circular setting up norms for categorising schemes in October 2017. This was done to prevent the duplication of schemes and the use of confusing or potentially misleading names. Mutual Funds were given two months to respond. Following a consultation process, fund houses have now begun modifying schemes to comply with the circular.
DSP BlackRock one of India’s largest fund houses has announced its changes today. Investors will be given one month starting from February 14th, 2018 to exit the fund without any exit load if they wish to do so. However, an exit will attract short-term capital gains for holding periods less than three years and long-term capital gains tax for longer holding periods.
In this article, we cover the changes affecting DSP BlackRock Income Opportunities Fund.
DSP BlackRock’s Income Opportunities Fund is a Rs 7,200 crore debt (credit opportunities) fund with five-year returns of 9% and 10-year returns of 8.21% (both annualized). It has been managed by Laukik Bagwe and Pankaj Sharma since July 2016. The fund is rated 2 stars by Value Research and 4 stars by Morningstar.
SEBI has mandated that the category of ‘credit risk fund’ has a minimum of 65% of its portfolio in corporate bonds below the highest grade. To comply with this mandate, DSP BlackRock has modified its Income Opportunities Fund as follows.
No reference to credit rating or issuer type
80-100% of corpus in money-market or debt securities with residual maturity of 0-5 years
0-20% in debt securities with residual maturity over 5 years.
No reference to REITs and InVITEs
Scheme defined by credit rating and issuer type
0-65% of corpus in corporate bonds rated AAA or below
0-35% in other debt and money market securities
0-10% in REITs and InVITEs
REITs and InVITEs are Real Estate Investment Trusts and Infrastructure Investment Trusts respectively. They are vehicles for investing in physical assets such as real estate and infrastructure and earn a yield from the rental income from these assets.
The fund will also now be able to lend out up to 20% (5% to anyone counterparty) of its securities in the market to earn an extra yield.
Finally, the fund will now be able to use Interest Rate Futures more extensively.
The fund’s current allocation to securities below the highest grade (AAA) is 62.5%. So an increase to 65% will be marginal.
The vast majority of these are corporate bonds already.
The investment in REITs and InVITs will diversify the fund’s holdings.
The securities lending and interest rates future will allow the fund to improve its yield and reduce risk.
Should you exit?
No, given that the principal change in holdings (65% below AAA bonds) will be marginal from the current portfolio.
The ancillary changes can have beneficial effects. However, nothing conclusive can be said about them at this stage.