Union Mutual Fund has launched an open-ended debt scheme, Union Medium Duration Fund (UMDF). It will invest in debt and money market instruments such that the Macaulay Duration of the fund is between 3-4 years under normal circumstances.
What is a medium duration fund?
As per the SEBI classification, a medium duration fund will invest primarily in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3-4 years.
Note that bond prices are inversely related to the interest rates. Hence, a bond that has a longer maturity is extremely price-sensitive to changes in the interest rate as compared to bonds having a short duration.
Since a medium duration fund focuses on the medium to longer end of the yield curve, they are highly sensitive to interest changes.
The fund house is of the opinion that the successive repo rate cuts by the RBI bodes well for the medium duration funds, hence it launched UMDF and will ensure to look at attractive opportunities on the yield curve to generate returns through this fund.
Table 1: Details of Union Medium Duration Fund
|An open-ended medium-term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 3 to 4 years.
|Medium Duration Fund
|To seek to generate income and capital appreciation by investing in Fixed Income Securities and Money Market Instruments.
However, there is no assurance that the Investment Objective of the Scheme will be achieved.
|Rs 5,000 and in multiples of Re 1 thereafter
|Rs 10 per unit
|Upto 15% of the units allotted may be redeemed / switched out without any exit load. Any redemption / switch out in excess of 15% of units allotted shall be subject to the following exit load. Redemption of units would be done on First on First Out basis (FIFO):
|Mr Parijat Agrawal and Mr Anindya Sarkar
|CRISIL Medium Term Debt Index $
|August 24, 2020
|September 7, 2020
$CRISIL Benchmark Disclaimer: CRISIL Indices are the sole property of CRISIL Limited (CRISIL). CRISIL Indices shall not be copied, transmitted or distributed in any manner for any commercial use. CRISIL has taken due care and caution in computation of the Indices, based on the data obtained from sources, which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Indices and is not responsible for any errors or for the results obtained from the use of the Indices. CRISIL especially states that it has no financial liability whatsoever to the users of CRISIL Indices.
(Source: Scheme Information Document)
How will the scheme allocate its assets?
Under normal circumstances, it is anticipated that the asset allocation of UMDF will be as follows:
Table 2: UMDF ‘s Asset Allocation
|Indicative Allocation (% of Total Assets)
|Debt and Money Market Instruments^
|Low to Medium
|Units issued by REITs and InvITs
|Medium to High
^Investment in Debt and Money Market Instruments will be such that the Macaulay Duration of the portfolio will be between 3 years to 4 years under normal circumstances. In case of anticipated adverse situation(s), the portfolio Macaulay Duration will be between 1 year to 4 years.
Investment in Securitized Debt- Nil Investments in Derivatives – upto 20% of the net assets of the Scheme. The total debt derivative exposure will be restricted to 20% of the net assets of the Scheme. The Scheme shall not invest in equity derivatives. Investment in derivatives shall be for hedging, portfolio balancing and such other purposes as maybe permitted from time to time.
Investments in Securities Lending – upto 20% of the net assets of the Scheme (where not more than 5% of the net assets of the Scheme will be deployed in securities lending to any single counterparty).
The Scheme intends to invest in repo /reverse repo transactions in corporate debt securities, as per prevailing regulatory norms
(Source: Scheme Information Document)
What is the Investment Strategy of UMDF?
To achieve the investment objective, the Union Medium Duration Fund will invest in a portfolio of Debt and Money Market Instruments such that the Macaulay Duration# of the portfolio is between 3-4 years under normal circumstances and 1-4 years in anticipated adverse situation(s).
The fund management team will take an active view of the interest rate environment by tracking various parameters of the Indian economy. It will take into account the various variables affecting the interest rate scenario, relative valuation of the securities, quality of instruments, maturity profile of the instruments and liquidity of the securities. In depth credit evaluation of the issuers will be carried out by the investment team of the AMC.
This evaluation will be driven by internal and external research. The credit evaluation process includes analysing the operating environment, management, business profile, financials, and expected future performance of the issuers.
The investment team of the AMC will continuously monitor and review the macroeconomic environment, including the political and economic factors, money supply in the system, Government borrowing programme and demand and supply of debt instruments, credit pick up, etc., affecting the liquidity and interest rates.
#The Macaulay duration is the weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price. Macaulay duration can be calculated as follows:
- t = respective time period
- C = periodic coupon payment
- y = periodic yield
- n = total number of periods
- M = maturity value
- Current Bond Price = Present value of cash flows
The Macaulay duration can be viewed as the economic balance point of a group of cash flows. Another way to interpret the statistic is, it is the weighted average number of years an investor must maintain a position in the bond until the present value of the bond’s cash flows equals the amount paid for the bond.
The Scheme may also invest in the units of REITs and InvITs for diversification, subject to conditions prescribed by SEBI from time to time.
Who will manage the Union Medium Duration Fund?
The Union Medium Duration Fund will be co-manged by Mr Parijat Agrawal and Mr Anindya Sarkar.
Mr Parijat Agarwal Heads the Fixed Income domain at the Union Mutual Fund. He holds an Electronics & Communications Engineering degree to his credit along with a Post graduate diploma in management from IIM – Bangalore.
He has over 24 years of experience in Fund Management. Before joining Union Asset Management Company Private Limited as Head – Fixed Income with overall responsibilities of Portfolio Management of Fixed Income and Hybrid Funds in September 2010, he was with SBI Mutual Fund as the Head of Fixed Income with responsibilities of Portfolio Management of Fixed Income and Hybrid Funds for 4 years. Prior to that for 2 years at State Bank of Mauritius Limited he was managing the entire Treasury functions of the Bank. And before for 3.5 years he was with SUN F&C Asset Management as Fund Manager responsible for Portfolio Management of Fixed Income and Hybrid Funds.
Some of the schemes that Mr Parijat currently manages at the fund house include Union Balanced Advantage Fund (formerly Union Prudence Fund), Union Dynamic Bond Fund, Union Equity Savings Fund, Union Corporate Bond Fund and Union Capital Protection Oriented Fund – Series 8.
Table 3: Performance of Schemes manged by Mr Parijat
|Scheme Returns (%)
|Union Dynamic Bond Fund
|Crisil Composite Bond Fund Index
|Union Balanced Advantage Fund
|S&P BSE Sensex 50
|Union Corporate Bond Fund
|Crisil Composite Bond Fund Index
|Union Equity Savings Fund
|CRISIL Short Term Debt Hybrid 75+25 Fund Index
Data as on August 26, 2020
(Source: ACE:MF; Personalfn Research)
From the performance table it is clear that most of the schemes managed by Mr Parijat haven’t been able to perform well. This doesn’t give much confidence to investors.
Mr Anindya Sarkar is a Co-Fund Manager at Union Asset Management Company Private Limited. He has done his Civil Engineering, MBA in Finance, MBA in Risk and Insurance and FRM. He has over 17 years of experience in Financial Services Sector.
Before joining the Union Asset Management Company Private Limited as a Vice President of Risk Management, he was into his family business at Sarcon Blockbuild Ltd. before that he worked part time at Navigators Inc. and St. John’s University while pursuing MBA in Risk and Insurance. Before that for 7 years he was at ICAP India Private Limited as a Dealer of Fixed Income.
Currently at the fund house Mr Anindya co-manages Union Corporate Bond Fund.
The outlook for Union Medium Duration Fund
To achieve the stated objective of the scheme, Union Medium Duration Fund will follow an investment process to construct a medium duration portfolio with an eye on the underlying risk.
Image: Proposed Investment Process
(Source: Union Medium Duration Fund)
The debt instruments in the market can be broadly categorised as those issued by corporates, banks, financial institutions, and those issued by state / central governments. The risks associated with bond market investment are subject to credit risk, interest rate risk, and liquidity risk.
After RBI’s successive out-of-cycle policy rate cuts and proactive liquidity management, the bond yields have softened with a sharp rally in bond prices. The rally at the medium to longer end of the maturity curve is almost over, and may not offer the kind of returns we saw in the last one year.
Going forward, increased borrowing of up to Rs 12 trillion in the fiscal year 2020-21 is likely to exert upward pressure on the bond yields. So far, the Indian debt market has withstood the government’s heavy debt supply abetted by policy rate cuts from the RBI. While banks are deploying their excess cash amid tepid credit growth, only about a third of the government’s planned bond sale has been completed so far.
Likewise, the recent rating downgrade to ‘Baa3’ with a negative outlook by Moody’s (due to weak implementation of reforms since 2017; relatively low economic growth over a sustained period; significant deterioration in fiscal position; and rise in stress in the financial sector) would have an impact bond market.
It is also important to recognise that in the current uncertain times, with yields at a multi-year low, the longer end of the yield curve could be more sensitive than the shorter end. Moreover, the corporate bond segment (especially private issuers) is already under pressure due to the stress in corporate revenues amidst Covid-19 lockdown, and seems to be riskier than Government and Quasi-Government backed securities.
Hence, it’s crucial to see how the fund managers assess these aspects during portfolio construction and the kind of credit risk they are willing to expose investors to at this point. Thus, the fortune of UMDF will be hinged on the credit quality of securities held in its portfolio.
This article first appeared on PersonalFN here