Multiple events of rating downgrades and defaults in securities of debt mutual fund schemes in the recent past have made investors risk-averse. With most business operations affected due to the pandemic crisis, investors are pushed to seek safety for their investments. They have shunned credit-risk-oriented categories for categories that invest predominantly in high-rated and liquid securities.
Banking and PSU fund, a category of debt fund, is one such category that emerged as a winner amid the debt crisis. Portfolios of Banking and PSU Funds mainly comprise of government and quasi-government securities along with some exposure to top names in the banking industry. These companies enjoy high-credit rating and government backing, which makes it highly liquid and less prone to credit risk.
In view of this Baroda Mutual Fund has launched Baroda Banking and PSU Bond Fund. The fund will predominantly invest in a diversified portfolio of debt & money market instruments issued by PFIs, PSUs, Banks, Treasury Bills & Government Securities. The fund manager will run a blend of active duration & accrual strategy with an average maturity of 3 – 5 years.
Being a Banking and PSU Fund, Baroda Banking and PSU Bond Fund is mandated to invest minimum 80% of its assets in debt and money market instruments consisting predominantly of securities issued by entities such as Banks, Public Sector Undertakings (PSUs), Public Financial Institutions and Municipal Bonds. The performance benchmark index of the fund is Nifty Banking & PSU Low Duration Bond Index.
Baroda Banking and PSU Bond Fund is an open-ended equity scheme that will seek to generate income through investing predominantly in AAA rated Debt instruments of Public Sector Undertakings, Public Financial Institutions & Banks. However, there is no assurance or guarantee that the investment objective of the scheme will be achieved.
Table 1: Details of Baroda Banking and PSU Bond Fund
|An Open ended Debt Scheme predominantly investing in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds
|Banking and PSU Fund
|To provide regular income through a portfolio of debt and money market instruments consisting predominantly of securities issued by entities such as Banks, Public Sector Undertakings (PSUs), Public Financial Institutions and Municipal Bonds. However, there can be 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
|– Mr Alok Sahoo
– Mr Karn Kumar
– Ms Hetal Shah
|Nifty Banking & PSU Low Duration Bond Index
|November 27, 2020
|December 10, 2020
(Source: Scheme Information Document)
Investment strategy – Baroda Banking and PSU Bond Fund
Baroda Banking and PSU Bond Fund will invest in a portfolio of debt and money market instruments consisting predominantly of securities issued by entities such as Banks, Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), and Municipal Bonds.
The fund will identify attractive investment opportunities based on the government policies, economic development, monetary policy, research report and overall economic conditions and development. The companies that meet initial selection norms are evaluated based on financial parameters such as:
- Fundamentals of business,
- Quality of management,
- Financial strength of the company and the key earnings drivers,
- Net worth,
- Interest coverage ratio,
- Profitability track record
- Liquidity of the securities /instruments
The scheme will emphasize on well managed companies with above-average growth prospects that can be purchased at a good yield. It will mainly invest in securities listed as investment grade by a recognized authority such as CRISIL, CARE, ICRA, etc.
The scheme’s investment in sovereign papers will be based on the interest rate expectations through analysis of macro factors such as, inflation data, credit growth, liquidity, money supply, fiscal numbers, and global interest.
The fund manager will aim to invest 50%-65% of the portfolio in securities maturing in less than 2 years. It will endeavour to actively manage duration by investing 25%-40% in securities maturing in 5-10 years.
Under normal circumstances the fund’s asset allocation pattern will be as under:
Table 2: Asset Allocation of Baroda Banking and PSU Bond Fund
|Indicative Allocation (% of assets)
|Debt and money market instruments issued by Banks, Public Sector Undertaking (PSUs), Public Finance Institutions (PFIs), and Municipal Bonds
|Low to Medium
|Debt (including government securities) and money market instruments issued by entities other than Banks, PFIs, and PSUs
|Low to Medium
|Units of REITs &InvITs
|Medium to High
(Source: Scheme Information Document)
Who will manage Baroda Banking and PSU Bond Fund?
Baroda Banking and PSU Bond Fund will be managed by Mr Alok Sahoo, Mr Karn Kumar and Ms Hetal Shah
Mr Alok Sahoo is the Head – Fixed Income at Baroda Mutual Fund. Mr Sahoo is a management graduate in Finance from XIM, Bhubaneswar, with a BE degree from NIT, Rourkela. He has been working in the investment area in asset management for more than 17 years. Prior to joining the AMC, he was fixed income fund manager at UTI Mutual Fund and HSBC Mutual Fund. He was also the Fund Manager for the Employee Provident Fund at HSBC Asset Management. He has experience in the credit research of companies as well.
Mr Karn Kumar is a Fund Manager (Debt) & Senior Credit Analyst at Baroda Mutual Fund. Mr Kumar has more than 13 years of experience in Fixed Income, credit research, and corporate finance. Prior to joining the AMC, he worked with CRISIL Ltd. and ICICI Bank in areas of credit research and structured finance. He has also worked with Sterlite Industries Limited in the Corporate Finance team.
Ms Hetal Shah is the fund manager – Debt and dedicated manager for overseas investments. Ms Shah is a B.Com, MBA, and JAIIB, with over 20 years of experience in treasury and fund management. Before joining the AMC, she was working in the Treasury Department of Bank of India from May 1999.
She is the debt fund manager and dedicated fund manager for various schemes including Baroda Gilt Fund, Baroda Conservative Hybrid Fund, Baroda Liquid Fund, Baroda Treasury Advantage Fund, Baroda Short Term Bond Fund, etc.
Fund outlook – Baroda Banking and PSU Bond Fund
Interest rates on small savings schemes and Bank deposits have been declining since RBI started reducing policy rates. So if you are willing to take slightly higher risk for higher returns, Banking and PSU funds can be considered as a worthy alternative to these investments.
Securities of government and quasi-government issuers are usually of superior credit quality and highly liquid as compared to instruments of other private sector issuers, which make it less prone to credit risk.
Do note that while credit risk in this category is low, it is prone to interest rate fluctuation. When interest rates start rising, these funds may generate lower returns.
This makes Baroda Banking and PSU Bond Fund suitable for investors having moderate risk appetite and an investment horizon of at least 3 to 5 years.
This article first appeared on PersonalFN here