L&T Financial Services Mutual Fund is repositioning its existing Banking & PSU fund which is an open-ended debt scheme. As the name suggests this scheme invests in debt and money market instruments of banks, public sector undertakings, public financial institutions and municipal bonds.
There are a total of 20 funds in this category with a combined AUM of Rs 42,000 crore. L&T Banking and PSU fund has an AUM of Rs 108 crore. IDFC Banking & PSU Debt Fund is the top performer over 1 year period and has delivered 8.82% returns. For 3-year period – Aditya Birla Sun Life Banking & PSU Debt Fund is the top performing fund with CAGR returns of 8.25%. While L&T Banking and PSU fund has given 6.35% returns over 1 year period and 7.31% over 3 year period.
And now the AMC is repositioning this scheme to take advantage of prevailing high yield levels for a 3-4 year investment horizon through a portfolio of PSU bonds / AAA-rated instruments. The reconstructed portfolio will have 100% allocation to high quality AAA issuers only. The fund house thinks, since Indian economy is experiencing slow growth momentum and low inflation, there is a room for further rate cuts.
They believe Reserve Bank of India (RBI) would follow a dovish path, indicated by a surprise repo rate cut in Feb’19. If more rate cuts materialise, the yields of corporate bonds and government securities would reduce – making current yield levels most opportune ones.
A key rationale that supports this thesis is attractive spreads of AAA PSU bonds in the 4-year space. Spreads are indication of risk premium over benchmark government securities. Typically, current spreads are compared with historical averages – higher the spread higher will be the possibility of corporate bond yields eventually coming down and bond prices going up (bond yields and prices are inversely proportional to each other) leading to capital appreciation.
For 3 & 5 year period, spreads of AAA corporate bonds over G-sec are in the range of 100-140 basis points (one basis point is 1/100th of a percentage point) – widest in last five years.
L&T Banking & PSU Fund intends to invest in the securities maturing by April-May 2023. All incremental investments within next three to four years will get invested in the same maturity bucket of securities. The scheme will continue to follow its earlier asset allocation i.e. to invest 80% – 100% of its assets in debt & money market instruments or securities issued by Banks, Public Sector Undertakings (PSUs) and Public Financial Institutions (PFIs) and Municipal Bonds including CBLO. And remaining 20% of assets in securities issued by other entities.
This scheme is benchmarked against the CRISIL Short Term Bond Fund Index. The main objective of index is to track the performance of a debt portfolio that includes government securities, AAA/AA+/AA rated corporate bonds, CPs and CDs. The index has given returns of 7.57% over 1 year period and 7.62% over 3 year period as on 8th March 2019.
The AMC has done below Scenario Analysis for the re-positioned scheme:
Key Highlights of Re-positioned Portfolio:
– Target portfolio maturity of 4 years
– Portfolio yield of approx. 8.25% p.a. gross at inception, given the current high yield environment
– Tax treatment: 20% with indexation benefits for holding period of 3 year and above
– 100% AAA portfolio, with no investment in G-secs
– Exit Load: NIL
Rupeeiq Take: This product endeavours to follow a roll-down strategy – which means portfolio’s average maturity will reduce steadily and all the fresh inflows would be deployed in securities having maturity similar to prevailing average maturity of the portfolio. In simple terms, the fund house is trying to run an open-ended FMP by repositioning this fund. As the yields are attractive this bodes well for retail investors. Conservative investors who are comfortable with traditional bank fixed deposits can take exposure in this fund. Compared to FMPs and FDs, this fund seems to be a better choice as it offers a high-quality portfolio coupled with high liquidity, as you can redeem your investments anytime unlike in FDs and FMPs wherein you have to wait till the maturity date. Existing investors who don’t want to invest in a risk averse fund can think of other debt funds that offer higher yields.