Debt schemes can be categorised as low duration funds, short duration funds, medium duration funds, long duration funds, etc. based on their maturities. The medium duration funds, as the name suggests, hold a maturity lower than short duration funds and higher than long duration funds.
According to the SEBI mandate, medium duration funds will invest primarily in debt and money market instruments with a Macaulay duration of 3-4 years. Notably, the bond prices are inversely related to the interest rates and any changes in interest rates, due to positive or negative economic cycles over time, will affect the performance of the fund.
The medium duration fund tends to do well when interest rates are expected to remain stable or decline. When it comes to interest rate risk, medium duration funds are riskier compared to short duration funds, but less risky when compared to long duration funds. Hence, fixed income investors seeking to invest in medium duration funds should be able to tide over the market volatility with a moderate to high-risk appetite.
The Reserve Bank of India (RBI) came into action to support the economic slowdown and took measures to reduce the policy rates. With the uncertainty of growth expected to continue for most part of the FY2021-22. RBI is likely to stay growth supportive by maintaining the current low policy rates and surplus systemic liquidity.
Looking at this scenario, Invesco Mutual Fund identified a new opportunity in the 3-5 years segment and launched Invesco India Medium Duration Fund. It is an open-ended medium term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 3-4 years.
Mr Saurabh Nanavati, CEO at Invesco Asset Management (India) Pvt. Ltd. has stated, “Fixed-income investments play a vital role in every investment portfolio, besides generating stable income they also help in reducing overall portfolio risk as they are less volatile and have a low correlation with equity market returns. The new fund launched is aimed at capturing the current market opportunities both on the yield curve as well as on the credit market.”
“If you look at the current fixed income markets, the yield curve has steepened during pandemic; at the short end, yields have moved sharply lower on account of ample systemic liquidity & accommodative monetary policy stance; while the long end of the curve has still remained elevated due to higher fiscal concerns, though anchored by RBI through various tools like Government Securities Acquisition Program (G-SAP). With this backdrop in mind, we believe the 3-5 years segment, which offers high accrual, presents itself as an attractive investment opportunity from risk-reward perspective. Investors with a medium to a long term horizon with moderate risk appetite can consider investing in this fund.” He added further.
Table 1: Details of Invesco India Medium Duration Fund
|An open-ended medium term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 3 years and 4 years.
|Medium Duration Fund
|To generate income by investing in a portfolio of Debt and Money Market Instruments such that the Macaulay duration of the portfolio is between 3 years and 4 years. However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved. The Scheme does not assure or guarantee any returns.
|Rs 1000/- and in multiples of Re 1 thereafter. Additional Purchase Rs 1000/- and in multiples of Re 1 thereafter.
|Rs 10/- per unit
|CRISIL Medium Term Debt Index
|June 29, 2021
|July 13, 2021
(Source: Scheme Information Document)
What will the Investment strategy for Invesco India Medium Duration Fund be?
Invesco India Medium Duration Fund will predominantly invest in a portfolio of debt and money market instruments with an aim to generate income from active credit spread management, while maintaining portfolio Macaulay duration between 3-4 years under normal circumstances.
At all times, the scheme will target securities which can offer an optimal level of yields/returns, while giving due emphasis to its risk-reward characteristics. The investments will be made after a detailed assessment of the liquidity, rates and the state of the credit market.
The Fund will use the in-house comprehensive credit assessment framework to identify issuers with upside credit metrics or issuers in certain sectors with upside potential. The allocation will largely be in the corporate debt and money market segment of the curve and in the sovereign segment of the market.
The Scheme will take controlled and selective exposure to high credit quality investments – no exposure below AA-rated papers. Investments in debt securities will be made from the list approved by the proprietary credit assessment model (from time to time), which is a credit-scoring model targeted to identify the credit strength of the borrower.
Apart from investing all of its assets in Debt (including government securities) and Money Market Instruments, it may also invest up to 10% in Units issued by REITs and InvITs in order to meet liquidity requirements.
Under normal circumstances, asset allocation will be as under:
Table 2: Asset Allocation of Invesco India Medium Duration Fund
|Indicative Allocation (% of Total Assets)
|Debt (including government securities) and Money Market Instruments*
|Low to Medium
|Units issued by REITs and InvITs
|Medium to High
*The portfolio shall have Macaulay duration between 3 years to 4 years.
(Source: Scheme Information Document)
Who will manage Invesco India Medium Duration Fund?
Mr Vikas Garg, Mr Krishna Cheemalapati, and Mr Neelesh Dhamnaskar (for foreign securities) will be the dedicated fund managers for this scheme.
Mr Vikas Garg is Head – Fixed Income at Invesco Asset Management (India) Pvt. Ltd. and he has over 15 years of experience of which 13 years in credit analysis & fixed income market. Prior to this, he was associated with L&T Investment Management Ltd. as Portfolio Manager – Fixed Income, FIL Fund Management Pvt. Ltd. as Credit Analyst and ICRA Ltd as Senior Analyst – Financial Sector.
Mr Garg’s qualifications include, B. Tech., M. Tech. (Chemical Engineering, IIT, Delhi), PGDBM (XLRI, Jamshedpur), and CFA Charter – USA. The other schemes under his management are Invesco India Short Term Fund, Invesco India Corporate Bond Fund, Invesco India Credit Risk Fund, Invesco India Treasury Advantage Fund, Invesco India Money Market Fund, Invesco India Fixed Maturity Plans of varying maturities, and Invesco
Mr Krishna Cheemalapati is Fund Manager at Invesco Asset Management (India) Pvt. Ltd. and has over 21 years of experience in Fixed Income market. Prior to this, he has worked with Reliance General Insurance Company Ltd. as Chief Investment Officer.
His qualifications include B.E. (ECE), PGDBA, and CFA (ICFAI, Hyderabad). The other schemes he manages are Invesco India Liquid Fund, Invesco India Ultra Short Term Fund, Invesco India Short Term Fund, Invesco India Corporate Bond Fund, Invesco India Credit Risk Fund, Invesco India Treasury Advantage Fund, Invesco India Money Market Fund, Invesco India Fixed Maturity Plans of varying maturities, Invesco India Overnight Fund, Invesco India Gold Fund, Invesco India Gold Exchange Traded Fund, (for debt investments) Invesco India Equity & Bond Fund, Invesco India Equity Savings Fund, and Invesco India – Invesco Global Consumer Trends Fund of Fund.
Mr Neelesh Dhamnaskar is Fund Manager at Invesco Asset Management (India) Pvt. Ltd. and has over 14 years of experience in equity research. Prior to this, he has worked with ENAM Securities Direct Pvt. Ltd., KR Choksey Shares and Securities Pvt. Ltd. as Equity Research Analyst and Anand Rathi Securities Ltd. as Commodities Research Analyst.
Mr Dhamnaskar is a Commerce Graduate and MMS (Finance), the other schemes managed by him are Invesco India Feeder – Invesco Pan European Equity Fund, Invesco India Feeder – Invesco Global Equity Income Fund, Invesco India – Invesco Global Consumer Trends Fund of Fund, Invesco India Infrastructure Fund, and Invesco India Midcap Fund.
Fund Outlook – Invesco India Medium Duration Fund
Invesco India Medium Duration Fund is positioned to capitalize on some of the current opportunities in the fixed income market. The scheme will invest in debt and money market securities with majority of the exposure to bonds, which will mature between 3-4 years.
This scheme’s portfolio will be constructed based on a detailed assessment of credit quality, interest rate view, liquidity, duration and diversification. The scheme will follow in-house comprehensive bottom-up credit assessment framework, which is an integrated approach to risk reward based security selection and for portfolio construction.
Do note that a medium duration fund focuses on the medium to longer end of the yield curve and thus, they are highly sensitive to interest rate changes. If you look at the current fixed income markets, the longer end of the yield curve may remain volatile due to the continuing fiscal concerns.
Moreover, since the scheme will invest a significant portion in corporate securities and 15%-25% exposure towards select AA+/AA/AA- rated bonds it could be prone to credit risk.
Therefore, it is essential to see how the fund manager assess these aspects during portfolio construction. Before investing in this scheme, you must ensure to have a moderate to high-risk appetite, investment horizon of at least 3-5 years and your investment objective should align with the fund.
This article first appeared on PersonalFN here