Investica’s Recommendation : A Corporate Bond Fund for Short Term Investment

After the recategorization exercise, SEBI created 16 different debt categories; in order to make fund selection easy for investors based on their risk profile and investment horizon. As we have mentioned a lot of times before, debt funds need more due diligence while selecting a fund. But if selected properly, Debt funds make a great investment for conservative investors.

In this week’s Investica’s Recommendation, we are analyzing at a corporate bond fund suitable for conservative investors who wish to invest for the short term.

HDFC Corporate Bond Fund: A Fund for Short Term Investment

HDFC corporate bond fund is suitable for an investment period of 1-3 years with less risk. The investment objective of the fund as stated by the fund house is :

To generate income/capital appreciation through investments predominantly in AA+ and above rated corporate bonds. There is no assurance that the investment objective of the Scheme will be realized.

We will look at the credit quality of the underlying portfolio and the interest rate risk exposure and see why it is suitable for short term investments.

Credit Risk Exposure

The credit quality of the underlying portfolio of a debt fund is the most important aspect of a debt fund. Lower credit quality increases the default risk in the portfolio. HDFC Corporate bond makes at least 80% of the investment in bond with a rating of AA+ or above it. Here’s a portfolio breakup with top 10 holdings:

If we look at the underlying portfolio, 84% of exposure is in AAA/A1+ rated bonds, 12.21% of exposure is in Government bonds and the remaining 3.79% of exposure is in Cash.

Hence, credit quality wise, the HDFC Corporate Bond fund is phenomenal and poses no near term default risk.

Interest Rate Risk Exposure

Interest rate risk can impact the fund performance adversely over the short term. Hence if your investment horizon is 1-3 years, you should select a fund with lesser interest rate risk exposure.

So how do you know if there is interest rate risk associated with a fund?

You should look at the Modified Duration or Macaulay Duration of the fund. If it is higher, then interest rate risk is higher and if it is lower then interest rate risk is lower.

For HDFC Corporate Bond Fund, the Modified Duration as of 31st May 2020 is 2.88 years. This makes the fund ideal for the investment of 1-3 years.

Fund House

Started in 1999, HDFC Mutual Fund was set up as a joint venture between Housing Development Finance Corporation Limited (“HDFC”) and Standard Life Investments Limited (“SLI”). HDFC Corporate Bond Fund is managed by two fund managers:

• Mr. Anupam Joshi (Fund Manager – Fixed Income) – Managing the fund since October 2015.
• Mr. Chirag Dagli (Fund Manager) – Managing the fund since July 2019.

Should you invest in this Corporate Bond Fund?

For most conservative investors, equity funds are not suitable due to extreme volatility. At the same time, traditional investment options like FDs are giving lower returns due to falling interest rates. In such a scenario, corporate bond funds are a great addition to the portfolio.

Additionally, debt funds also have a higher edge over FDs in terms of tax treatment if held for more than 3 years. Long term capital gain is taxed at 20% after indexation for debt funds. The indexation benefit reduces the total tax liability for the investor.

As we have mentioned before, the credit quality of the debt fund is of utmost importance. Hence, considering the fund quality, you should invest in HDFC Corporate Bond fund if you wish to invest for 1- 3 years with considerably low risk.

With this, we are ending our Investica’s Recommendation series here. Do you want us to review a fund of your choice? Let us know and we will take it up in the upcoming blogs.