Selecting the right bond funds in India for investment

The bond market in India continues to look attractive for Non-Resident Indians to invest, but caution is needed in choosing the right funds for investment. 

In the past few months there have been credit quality concerns with several bond issuers (companies borrowing in the short and long term bonds market), and thus it is advisable to stick to sovereign bond funds (gilt funds) and bond funds holding the highest rated corporate securities (“AAA” for long term and “A1+” for short term). 

The second half of 2018 and thereafter has been witness to quite a few Indian companies defaulting in the local market on their interest and/or principal payments, or have been subjected to rating downgrades by credit rating agencies. This has adversely impacted debt mutual funds holding bonds or short term debt papers issued by these companies. Some of these securities were issued by well-known companies such as IL&FS, Dewan Housing Finance (DHFL), Essel Group, Anil Dhirubhai Ambani Group, Sintex Industries. Most of the securities of these companies had the highest (domestic) rating of  “AAA” at the time of investment by the mutual funds.

Ideally, for a new investor, an initial allocation to gilt funds, low duration and medium duration funds with the highest credit rating is the best way to start. Subsequent allocation may be made in dynamic bond funds, and once liquidity concerns in the financial markets diminish, a small allocation in credit risk funds may be made for higher returns. 

The Budget proposal of issue of foreign currency bonds in the overseas market has also enthused the bond market in India. However, since markets tend to discount future events in advance, the present yield levels would have factored in a part of the positive effect of a rate cut by the Reserve Bank of India (RBI). There is a liquidity issue as well in the non-bank finance companies, and there is a possibility that the inflation rate could inch up during the year. Therefore, a cautious strategy of investment in short to medium duration funds would be advisable. 

“I advise a balanced allocation to low duration category (with rating of A1+ /AAA), short term category (again with external credit rating of AAA) and dynamic bond funds. Further, once the investment kitty grows, investors can consider well managed credit risk funds”, says Bekxy Kuriakose, Head of Fixed Income at Principal Asset Management.

For a general insight into the popularity of debt funds in India, the Annexure below would give an indication of the portfolio size/ assets under management of various categories of debt mutual funds. 

It is recommended that you consult your tax consultant before you start investments as an NRI in the Indian bonds market, either through the PIS in bonds or through mutual funds.

Annexure: DEBT MUTUAL FUND DATA                    [Rupees Crores]

 

Scheme Category No. of schemes as on May 31, 2019 Net Assets Under Management as on (Since April 01, 2019 to May 31, 2019) Average Net Assets under Management for the month May 2019
1 Overnight Fund 18 13713.20 14379.81
2 Liquid Fund 40 548835.10 539505.35
3 Ultra Short Duration Fund 25 89747.47 88290.32
4 Low Duration Fund 26 89278.72 89191.91
5 Money Market Fund 16 62503.85 60858.37
6 Short Duration Fund 29 81695.20 81735.28
7 Medium Duration Fund 17 35234.77 35712.89
8 Medium to Long Duration Fund 13 9951.00 9916.73
9 Long Duration Fund 2 1269.54 1174.44
10 Dynamic Bond Fund 28 19549.15 19620.13
11 Corporate Bond Fund 20 63593.45 62229.15
12 Credit Risk Fund 20 76305.38 77685.18
13 Banking and PSU Fund 18 39717.94 37395.85
14 Gilt Fund 22 7697.76 7516.97
15 Gilt Fund with 10 year constant duration 4 502.90 513.31
16 Floater Fund 8 30654.79 30247.66
  Sub total - I (1+2+3+4+5+6+7+8+9+10+11+12+13+14+15+16) 306 1170250.21 1155973.38

Source: SEBI [www.sebi.gov.in]

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Note: Connected to India articles on NRI personal finance are intended to help Non-Resident Indians (NRIs) understand the increasingly complex world of financial investments. It is not a solicitation, recommendation, endorsement, of any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

Author
Indraneel Basu
Indraneel Basu – Contributor

After 26 years in portfolio management & investment banking, Indraneel Basu is a consultant to insurance companies, a guest lecturer at business schools and a moderator for Insurance Institute of India exam papers on investment and accounts. He last worked as Chief Investment Officer at Universal Sompo General Insurance Co. Ltd. (June 2009-July 2016).  In the 90s, he had headed fixed income securities research & dealing at one of the largest finance companies in India, was head of business development at DebtonNetIndia.com (an IL&FS-NSE joint venture) 2000-2001, was VP (Debt Markets) with investment banking firms 2002-2005 and Director- Debt Capital Markets at IDFC 2006-2009.

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