Corporate Bond Funds are open ended debt funds which invest a minimum of 80% in AA+ and above rated paper. They invest in bonds issued by firms across sectors as well as those issued by the state and the central government.
The category has gained significant traction in the aftermath of the Corona pandemic as investors rushed to safety. Since April 2020, this category has received cumulative inflows worth Rs 73,502 crore, which is the highest among all categories of debt funds. Over a one year period, this category has delivered 5.99% return.
Corporate Bond Fund category has an average modified duration of 2.75, which implies that a 1% change in interest rates can affect the prices of the fund’s underlying bonds by 2.75%. This category would be less susceptible to changes in interest rates in comparison to gilt funds which can have a higher modified duration. Do note that these funds carry credit risk. That said, a higher allocation (minimum 80%) towards AA+ rated and above securities make Corporate Bond Funds relatively safer in comparison to Credit Risk Funds which invest a minimum of 65% in below highest rated papers.
Here are three corporate bond funds reviewed by our analysts in 2020.
Aditya Birla Sun Life Corporate Bond Fund
- Star Rating: 5 stars
- Analyst Rating: Silver
- Inception Date: September 2000
- Return: 9.60% (1 year), 9.07% CAGR (3 year), 8.71% CAGR (5 year), 9.36% CAGR (since inception)
- Analyst: Kavitha Krishnan
- Fund Manager: Maneesh Dangi and Kaustubh Gupta
- Fixed Income Style: Credit Quality (High), Interest Rate Sensitivity (Limited)
- Fund Overview
The core of the strategy lies in investing in high-quality corporate bonds across the yield curve. The manager also takes a duration view based on interest-rate directional movements. In line with its philosophy, the strategy allocates a portion of its assets (currently around 18%) to G-Secs and State Development Loans in addition to AAA/AA debt. Maneesh Dangi can vary his allocation towards these based on their valuations and relative spreads, in line with the fund’s mandate.
On the macroeconomic front, the team tracks headline indicators and tends to follow a market-linked strategy as opposed to a pure macro-based strategy. It has also been placing an increased emphasis on the promoter’s background and ability to service debts.
On the corporate bonds side, the fund house uses internal ratings as opposed to relying on external credit ratings. The ratings are presented to the investment committee, after which issuers can be invested into, but only after they make a grade on the internal research process. Given their focus on quality and liquidity, analysts tend to undertake an in-depth evaluation of management, corporate governance, financial standing of the issuers, liquidity, and risk. The team undertakes a detailed competitor analysis with a view to segment, evaluate, and categorise peer holdings across different maturity buckets.
HDFC Corporate Bond Growth
- Star Rating: 5 stars
- Analyst Rating: Neutral
- Inception Date: June 2010
- Return: 9.03% (1 year), 9.03% CAGR (3 year), 8.80% CAGR (5 year), 8.90% CAGR (since inception)
- Analyst: Himanshu Srivastava
- Fund Manager: Anand Laddha and Anupam Joshi
- Fixed Income Style: Credit Quality (High), Interest Rate Sensitivity (Limited)
- Fund Overview
The fund’s investment mandate is to invest at least 80% of assets in corporate bonds having AA+ and above rating. Although the fund’s broader portfolio framework remains intact, the change in its category has led to some tweaks. Earlier, the exposure to government securities was capped at 40% of the portfolio and the manager was not permitted to invest in any security having residual maturity beyond five years. However, as per the investment mandate of the corporate bond category, the exposure to government securities is capped at 20%; the restriction of not investing in a security with residual maturity beyond five years does not exist anymore.
The investment philosophy here is to optimise returns without taking excessive duration or credit risk. Although the manager takes active duration calls here to generate alpha, that is done with a measured approach and without going overboard. Expectedly, the investment approach relies on fundamental research. It entails combining qualitative aspects with quantitative analysis. The investment team prepares the coverage list with a strong focus on the company management and track record, financial strength of the promoter group, and corporate governance standards. Meetings with management are followed by rigorous quantitative analysis to get a measure of the company’s creditworthiness. The team studies the company’s cash flow and relevant ratios--leverage, coverage, and solvency. At this step, the team also draws on the expertise of its equity team.
The fund company uses a proprietary model in which qualitative and quantitative inputs are used to arrive at a credit score for each issuer. This in turn used to help managers determine the exposure they can take to each issuer, thereby acting as a risk-management tool for the individual portfolio and the fund company.
Here, the investment team lays more emphasis on risk control, thereby focusing on balancing safety, liquidity, and return. We think the investment process is thorough and that the manager and team are at home with the process.
Nippon India Corporate Bond Fund
- Star Rating: 4 stars
- Analyst Rating: Neutral
- Inception Date: September 2000
- Return: 7.48% (1 year), 7.71% CAGR (3 year), 7.77% CAGR (5 year), 7.65% CAGR (since inception)
- Analyst: Himanshu Srivastava
- Fund Manager: Vivek Sharma
- Fixed Income Style: Credit Quality (High), Interest Rate Sensitivity (Limited)
- Fund Overview
The fund is positioned within the defined template that determines the extent of duration and credit risk in the portfolio. Within these constraints, the manager tries to maximise the portfolio yield while maintaining high liquidity. The fund does not have a duration mandate but would typically maintain between one and 1.25 years based on their views on interest rates and the shape of the yield curve.
The investment strategy relies mainly on fundamental research. The manager’s overall emphasis is on building the portfolio with safety and liquidity, which is achieved through a disciplined risk-controlled investment process. The team also focuses on the business, management, financial health, and promoter group while selecting securities in the portfolio. The call on duration is taken by studying the macroeconomic scenario. The investment team incorporates the views of key external economists and an in-house economist on factors such as gross domestic product growth, inflation, fiscal deficits, and trends in government borrowing, which are important for managing this fund.
With Nippon’s large experience in the international market, the management team has been working over the past two years and has further enhanced the process. They have taken incremental measures to ensure adherence to its investment mandate. They have a predefined template for the duration and credit risk that funds can take based on their mandate. These ranges become the boundaries within which a manager operates. Periodic reviews are based on the quality of the credit, to determine if a change in position is required.
