FundsIndia Reviews: NFO of HDFC Corporate Debt Opportunities

HDFC Corporate Debt Opportunities is the new open-ended debt fund on the HDFC Mutual block. This fund, though coming out a bit late, may still find its place in the HDFC basket, given the AMC does not have a fund that will exclusively play credit risk opportunities.

The new fund will join the small crop of funds that are positioned to take credit risks. Coming as it does, when credit risks appear to have peaked, any improvement, both in the economy and corporate fortunes, could provide handsome gains from debt themes such as this one.

The NFO closes on March 20, 2014.

How debt funds gain

Most of the funds available today would make their gains in the following ways: one, interest rate accrual, that is – holding the instruments to accrue interest. Most liquid or liquid plus funds would follow this and in some cases, slightly longer date funds too.

Two, capital appreciation which arises in times of falling interest rates; that is, when yields fall, the price of the instrument appreciates thus providing capital gains that the fund manager may book.  Three, through gains that arise from the narrowing spread between corporate bonds and government securities.

In other words, when companies are fraught with higher credit risk, the difference between yields of corporate bonds and that of government securities widen. When the risk perception lowers, the spread narrows, thus providing gains in such bonds.

Four, a strategy called the ‘roll down on the yield curve’. This is employed by buying an instrument closer to its maturity (in which case most of the interest would have accrued in the price of the bond) but when interest rates are at their peak. This way, a fall in rates, would provide further capital appreciation opportunities, besides the interest that is already accrued.

What the fund will do

HDFC Corporate Debt Opportunities will seek to invest using mostly strategy one – that is returns through interest accruals by investing in a portfolio of corporate bonds. The accruals, of course will be higher than your normal debt funds simply because the fund will predominantly invest in AA-rated securities or below. Many of its papers may also be illiquid and would be required to be held till maturity.

The fund will also gain from any fall in interest rates or from the roll down effect mentioned above. Given that it would take credit risks, the fund will keep the interest rate risk at bay. While the scheme information document states that the fund would not go beyond an average maturity of 5 years, we reckon the fund would keep its average maturity in the 2-3 year bucket, given the opportunities there.

At present, funds such as Templeton India Corporate Bond Opportunities, which also  follow a credit opportunity strategy, have invested with average maturity of anywhere between 2-3 years.

With HDFC Corporate Debt Opportunities, given the parent group’s knowledge in the lending business, especially in segments such as real estate, the fund may benefit from the experience and assessment of the group in these segments.

Suitability

The fund is not for the usual bank deposit investor. It is more suitable for an aggressive and active investor with a long-term holding. Why? The fund will bet on instruments with modest credit rating hoping such profiles will improve. Instruments with modest rating are also often illiquid papers. But the fund will seek to reduce this risk through a buy and hold strategy.

If its bet does not provide capital appreciation, holding a high-yielding instrument till maturity will at least yield high income (interest).  But that means the fund is meant to be held for a longer period, if you wish to reap the benefit of such high yield. Also, an element of risk exists because of any possible default by the issuer.

The fund has an exit load if you redeem within 18 months of investing. It will be managed by Shobhit Mehrotra.

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