2. 2 2
Risks in Debt Market
Interest Rate Risk
Credit Risk
Valuation Risk (Erstwhile)
SEBIs circular Feb 2010 has mitigated the same
3. 3 3
Interest Rate Risk
In Debt Funds Income comes from
* Accrual of Interest
* Capital appreciation or depreciation due to interest rate
fluctutation
Higher the Portfolio maturity – Higher is the risk and
vice versa
We never saw -ve returns or fall in NAVs in liquid funds
earlier, but that too is possible although for very short
periods in extreme circumstances
4. 4 4
Prior to SEBI Feb 2010 Circular
Money market securities were valued on the basis of
amortization upto six months
Flexibility was given to fund houses in terms of spread
management across G-secs and other rated securities
Risk of non realisation of NAV in the above strategy was
realised when mass redemptions were received in 2008
after Lehman crisis
Hence Feb 2010 circular was released which laid down
valuation norms of debt securities
5. 5 5
Essential Parameters for selection of debt funds
- Investment Duration of customer
- Understanding of customer of the product where
his money will be invested and risks thereof
- Interest Rate Scenario
6. 6 6
Remember the Thumb Rule
The Duration of the Fund should be
Equivalent to the
investment duration of the client
7. 7 7
Suitablity of Product for Investor
Horizon below 1 month
Funds investing into Call money markets
Upto 3 years
Into static debt funds where their duration remains
constant most of the times and try match
investors duration and fund duration.
* Static Debt funds are the ones which keeps the duration of fund in a specific range.
8. 8 8
Example
Returns after 3 months in a fund having 3 months avg duration
will be equvivalent to current yield 9% i.e. 2.25%
But had he invested in a scheme having 3 year maturity
duration the returns could be -0.5%
However educating the customer is very important because
even for a 3 month investor and on rise of 1% i interest rates,
the NAV can go down on a particular day by 0.25%(absolute)
and may take some time to recover.
(Instant returns can be -ve)
When interest rates rise by 1 % and YTM is of 9%
9. 9 9
Income Funds / Dynamic Funds
To be offered only if the investment horizon is beyond 3
years or the customer has a view that the interest rates will
fall
To be offered only to sopshticated investors who
undrestands risk and are ready to take a short term
beating in returns
Only favorable in a falling interest rate regime otherwise
short term funds are better
10. 10 10
Current Interest Rate Scenario
10 year G Sec History
Mean since 1997 – 8.1%
Median since 1997 – 7.88 %
Movement Range - 13.65% - 5.02%
10 yr Gsec over 9% based on history looks favorable
however the current scenario is quiet volatile and
one should play safe
11. 11 11
NJ Initatives on Debt
Shall come out with a recommended category for
different tenures of investment
Shall come out with recommended schemes across
each debt category viz. Liquid / Shor Term / Income
A matrix of scenario analysis will be shared on a
quarterly basis with the partners
12. 12 12
Product Matrix
* Portfolio Durations mentioned are the range of duration funds
typically have in their portfolios. In certain time periods, funds can
operate other durations also as deemed fit by the fund manager.
Investment
Horizon
Product Category
Portfolio
Duration
Example
0-3 Month Liquid Funds / Call Money Funds
Less than 3
months
HDFC CMF Saving
3 month – 1 Year Money Manager Funds 3M - 12M
DSP BlackRock Money
Manager Fund
1 Year + Short Term Funds / FMPs 1Y - 2Y HDFC STP
2 Years + Accrual/Income Opportunities Funds / FMPs 1Y - 2.5Y
Birla Sun Life Short Term
Opportunities Fund Plan
3 Years + Income Funds / Dynamic Bond Funds / FMPs 3Y - 6Y HDFC Income Fund
13. 13 13
Recommendations
Money Manager Funds
Short Term Funds
No Scheme Name
AAUM in
Crs (June -
13)
Expense
Ratio (%)
Cash YTM (%)
Avg.
Maturity
(Yrs)
Mod.
Duration
(Yrs)
Exit Load
1 DSP BlackRock Short Term Fund 860.14 1.00 26.96 NA 0.79 0.68 Upto 6 months 0.50%
2 Kotak Bond Short Term Plan 2,214.12 1.13 3.10 10.45% 2.53 1.88 Upto 90 Days 0.50%
3 Reliance Short Term Fund 3,376.19 1.04 13.06 10.46% 2.11 1.75 Upto 6 months 0.50%
4 Tata Short Term Bond Fund 270.97 1.22 8.00 10.50% 1.34 1.17 Upto 180 Days 0.50%
Name
AAUM in
Crs (June -
13)
Expense
Ratio (%)
Exit
Load
Birla Sun Life Cash Manager - Gr 3,113.29 0.78 NIL
DSP BlackRock Money Manager
Fund - Gr
2,110.66 0.92 NIL
HDFC CMF - Treasury Advantage
Plan - Gr
8,604.18 1.14 NIL
Kotak Flexi Debt Scheme Plan A -
Growth
1,711.86 0.74 NIL
14. 14 14
Recommendations
Accrual Funds
Income Funds
Scheme Name
AAUM in
Crs (June -
13)
Expense
Ratio (%)
Cash YTM (%)
Avg.
Maturity
(Yrs)
Mod.
Duration
(Yrs)
Exit Load
1 Birla Sun Life Income Plus 5,143.96 1.77 19.43 9.04% - 5.49 Upto 365 Days 1%
2 BNP Paribas Bond Fund 279.35 1.93 8.32 10.77% 1.81 1.30 Upto 1 year 1%
3 DSP Blackrock Bond Fund 231.50 2.21 48.76 NA 3.46 2.18 Upto 12 months 1.00%
4 Kotak Bond Fund 6,971.17 1.80 4.32 9.40% 9.58 5.38 Upto 180 days 1%
5 L&T Triple Ace Bond Fund 846.09 2.00 19.78 NA 4.54 2.74 Upto 9 months 1.50%
6 SBI Magnum Income Fund 5,266.21 1.74 26.50 9.30% 4.85 3.18 Upto 1 year 1%
7 Tata Income Fund 1,272.45 1.11 13.93 9.73% 4.50 3.26 Upto 90 Days 1%
No Scheme Name
AAUM in
Crs (June -
13)
Expense
Ratio (%)
Cash YTM (%)
Avg.
Maturity
(Yrs)
Mod.
Duration
(Yrs)
Exit Load
1 Birla Sun Life Medium Term Plan 825.96 1.50 3.29
12.50%
- 1.50
Upto 365 Days 2%, Between
365 to 730 Days 1%
2 Birla Sun Life Short Term
Opportunities Fund
876.67 1.00 4.57 11.29% - 1.09 Upto 365 days 1%
3 DSP BlackRock Income
Opportunities Fund
497.70 1.79 17.71 NA 1.21 0.92 Upto 9 months 1.00%
4 Kotak Income Opportunities Fund 449.19 2.49 0.00 11.00% 2.67 1.95 Upto 1 year 2%
5 L&T Income Opportunities Fund 143.40 0.77 13.61
NA
2.25 1.80
Upto 1 Year 2% ,Between 1
to 2 Years 1%
6 Reliance Regular Savings Fund
Debt Plan
2,548.32 1.79 4.03 10.89% 1.92 1.65 Upto 1 year 1%
15. 15 15
Scenario Analysis – Income Funds
Returns are annualised for period of more than a year; Returns for rest of the periods are
on an absolute basis.
Scenarios are based on following assumptions:
YTM (9.80%), Modified Duration (4.80 years) and Expense Ratio (1.80%)
Assumptions are subject to change from time to time.
Interest Rate Movement
from current (bps)
Interest Rate Movement 3 Month 6 Month 1 Year 2 year 3 Year 5 Year
100 -2.68 -0.55 3.70 6.26 7.12 7.80
50 -0.34 1.73 5.85 7.14 7.56 7.90
0 2.00 4.00 8.00 8.00 8.00 8.00
-50 4.34 6.28 10.15 8.86 8.43 8.10
-100 6.68 8.55 12.30 9.71 8.87 8.21
-150 9.01 10.83 14.45 10.56 9.30 8.32
-200 11.35 13.10 16.60 11.40 9.73 8.43
Expected Returns
16. 16 16
Scenario Analysis – Short Term Funds
Returns are annualised for period of more than a year; Returns for rest of the periods
are on an absolute basis.
Scenarios are based on following assumptions:
YTM (11%), Modified Duration (1.50 years) and Expense Ratio (1.00%)
Assumptions are subject to change from time to time.
Interest Rate Movement
from current (bps)
Interest Rate Movement 3 Month 6 Month 1 Year 2 year 3 Year
100 1.13 3.75 9.00 9.82 10.09
50 1.81 4.38 9.50 9.91 10.04
0 2.50 5.00 10.00 10.00 10.00
-50 3.19 5.63 10.50 10.09 9.96
-100 3.88 6.25 11.00 10.18 9.92
-150 4.56 6.88 11.50 10.27 9.87
-200 5.25 7.50 12.00 10.37 9.84
Expected Returns
17. 17 17
Scenario Analysis – Money Manager Funds
Returns are annualised for period of more than a year; Returns for rest of the periods are
on an absolute basis.
Scenarios are based on following assumptions:
YTM (10.75%), Modified Duration (0.40 years) and Expense Ratio (0.80%)
Assumptions are subject to change from time to time.
Interest Rate Movement
from current (bps)
Interest Rate Movement 3 Month 6 Month 1 Year
100 2.21 4.83 10.05
50 2.35 4.90 10.00
0 2.49 4.98 9.95
-50 2.63 5.05 9.90
-100 2.76 5.13 9.85
-150 2.90 5.20 9.80
-200 3.04 5.28 9.75
Expected Returns
