Long duration funds are a type of debt mutual funds that invest in corporate bonds and government securities (G-secs) that have a long-term maturity period. A fixed-income investment avenue with a potential to generate Income over long term for debt investors. According to SEBI norms, medium to long term funds have a mandate to invest in debt and money market instruments in such a way that the Macaulay’s duration of the portfolio is 4 to 7 years.
The prevailing market seems to be well-positioned for long-term debt investors. The yield on the long-term G-sec and AAA-rated securities are at reasonable levels which can create an opportunity for long-term debt investors to look at investment in long duration funds.
Long duration debt funds are sensitive to changes in the interest rate and are more volatile than other categories of debt funds. Interest rates and prices of the debt instruments have an inverse relationship, which means that they move in opposite directions. For instance, a falling interest rate is good for debt funds or bond funds. Long duration debt funds usually benefit when the interest rates are moving downwards.
Given that, the government is aggressively attempting to control the spiralling inflation, the central bank takes action by raising interest rates and extracting liquidity, these measures would ensure containment of inflation in the near term. Additionally, hiking rates further will hamper the economic growth and the RBI may eventually be restricted at a certain point to raise rates. This could slow the increase in interest rates, and bonds with longer maturities may benefit from falling interest rates.
It is advisable to invest in long duration funds when the interest rates are expected to ease down because a decrease in the interest rates causes a rise in the prices of long-term securities. Investors who are comfortable with fluctuating interest rates in the market, may consider investing in long duration debt funds.
Aditya Birla Sun Life Mutual Fund has launched Aditya Birla Sun Life Long Duration Fund an investment avenue for long-term debt investors. It is an open-ended debt mutual fund scheme that invests in instruments with Macaulay duration greater than 7 years. A high-quality portfolio with active duration management strategy and tax efficient returns. Being open ended, this fund has no lock-in period and is highly liquid.
Table 1: Details for Aditya Birla Sun Life Long Duration Fund
| Type | An open-ended debt scheme investing in instruments with Macaulay duration greater than 7 years. A relatively high interest rate risk and relatively low credit risk. | Category | Debt Scheme – Long Duration Fund |
| Investment Objective | The primary investment objective of the scheme is to generate optimal returns while maintaining balance of yield, safety and liquidity. This income may be complemented by capital appreciation of the portfolio. Accordingly, investments shall be made in Debt & Money Market Instruments. The Scheme does not guarantee/indicate any returns. There can be no assurance that the schemes' objectives will be achieved. | ||
| Min. Investment | Rs 100/- and in multiples of Re 1 thereafter. Additional Purchase Rs 100/- and in multiples of Re 1 thereafter. | Face Value | Rs 10/- per unit |
| Plans |
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Options |
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| Entry Load | Not Applicable | Exit Load | Nil |
| Fund Manager | Mr Anurag Mittal | Benchmark Index | NIFTY Long Duration Debt Index A-III |
| Issue Opens: | July 22, 2022 | Issue Closes: | August 05, 2022 |
(Source: Scheme Information Document)
The investment strategy for Aditya Birla Sun Life Long Duration Fund will be as follows:
Aditya Birla Sun Life Long Duration Fund will aim to build a high-quality portfolio that includes sovereign G-Secs, State Development Loans, AAA rated Corporate or PSU bonds. The investment strategy is modelled around core allocation, tactical allocation, and active duration management.
- Core allocation – presently allocate between 14-year G-secs and 10-year SDLs
- Tactical allocation – increase allocation to 10-year SDLs and AAA bonds when spreads increase or are expected to reduce; to seek optimum returns
- Active duration management – basis interest rate scenario the fund shall alter portfolio duration between 7 to 15 years; managing duration risks
The fund management team will endeavour to maintain a consistent performance in the scheme by maintaining a balance between safety, liquidity and profitability aspects of various investments. The investments in debt instruments carry various risks like interest rate risk, liquidity risk, default risk, purchasing power risk etc. While they cannot be done away with, they can be minimized by diversification and effective use of hedging techniques.
The fund management team will take an active view of the interest rate movement by keeping a close watch on various parameters of the Indian economy, as well as developments in global markets. Investment views / decisions will be taken on the basis of the following parameters:
1. Prevailing interest rate scenario
2. Quality of the security / instrument (including the financial health of the issuer)
3. Maturity profile of the instrument
4. Liquidity of the security
5. Growth prospects of the company / industry
6. Any other factors in the opinion of the fund management team.
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation for Aditya Birla Sun Life Long Duration Fund
| Instruments | Indicative Allocation (% of net assets) | Risk Profile | |
| Minimum | Maximum | High/Medium/Low | |
| Debt Securities and Money Market Instruments | 0 | 100 | Low to Medium |
(Source: Scheme Information Document)
Subject to the Regulations, the asset allocation pattern indicated above may change from time to time, keeping in view market conditions, market opportunities, applicable regulations and political and economic factors. It must be clearly understood that the percentages stated above are only indicative and not absolute and that they can vary substantially depending upon the perception of the fund manager, the intention being at all times to seek to protect the interests of the Unit holders.
Who will manage Aditya Birla Sun Life Long Duration Fund?
Mr Harshil Suvarnkar and Mr Bhupesh Bameta (for overseas investments) will be the designated fund managers for this scheme.
Mr Harshil Suvarnkar has an overall experience of 12 years in the financial services industry and holds a Master’s degree in Management Studies (Finance) and Post Graduate Diploma in Securities Law & B. Com. Prior to joining ABSL AMC, he was associated with Indiabulls Housing Finance Limited for 10 years as Head – Markets, Treasury handling treasury investments, Asset Liability Management (ALM) and capital market borrowing.
At ABSL Mutual Fund, Mr Suvarnkar currently manages, Aditya Birla Sun Life Liquid Fund, Aditya Birla Sun Life Regular Savings Fund, Aditya Birla Sun Life Banking & PSU Debt Fund, Aditya Birla Sun Life Floating Rate Fund, Aditya Birla Sun Life Equity Hybrid ’95 Fund, Aditya Birla Sun Life Equity Savings Fund, Aditya Birla Sun Life Bal Bhavishya Yojna, Aditya Birla Sun Life Retirement Fund, Aditya Birla Sun Life Multi-Cap Fund, Aditya Birla Sun Life Nifty SDL Apr 2027 Index Fund and Aditya Birla Sun Life CRISIL IBX AAA – Jun 2023.
Mr Bhupesh Bameta will be managing the overseas investments of this scheme. He is a CFA Charter holder (CFA Institute, USA) and has completed B. Tech from (IIT Kanpur) and has an overall experience of more than 10 years in the financial services industry. Prior to joining ABSL AMC, he was working as Head of Research in Forex and Rates Desk at Edelweiss Securities Limited, covering global and Indian forex markets and economies, with Quant Capital for 6 years as an Economist and was covering Indian and global economy and markets.
At ABSL Mutual Fund, Mr Bameta currently manages, Aditya Birla Sun Life Government Securities Fund, Aditya Birla Sun Life Income Fund, Aditya Birla Sun Life Dynamic Bond Fund and Aditya Birla Sun Life Nifty SDL Apr 2027 Index Fund.
Fund Outlook – Aditya Birla Sun Life Long Duration Fund
Aditya Birla Sun Life Long Duration Fund will predominantly invest in sovereign securities with Macaulay duration greater than 7 years to generate optimal returns while maintaining balance of yield, safety and liquidity. The scheme aims to build a high-quality long-term portfolio, it provides investors access to a diversified portfolio of sovereign G-secs, SDLs and high-quality AAA rated bonds with long duration.
The prevailing market conditions can be conducive for long duration funds, long tenor yields are higher v/s pre-covid levels and term spreads are at an elevated level which is capturing aggressive future rate hike actions by RBI. The fund will seek to take benefit of the term spreads, managing tactical allocation between G-Sec, SDL and AAA Corporate bonds basis their spreads and actively modulate duration with an aim to seek optimum risk-adjusted returns for investors.
However, do note that Long duration debt schemes are extremely sensitive to interest rate changes. When interest rates increase, their value decreases. They gain the most when rates are lowering. When one invests for a long period in debt instruments, the investor goes through an interest cycle that would have an upward and downward phase. This means that interest rate swings would cause the investor to experience considerable volatility; even a minor hardening of the interest rate could make the scheme highly risky and volatile.
It is difficult to predict the interest rate movements. In case there are adverse developments such as a worsening geo-political scenario, rising inflation and a massive increase in government borrowings, bond yields can go up further and, in that case, investments in long-duration products will suffer. These factors among others, may have an adverse impact on the scheme’s performance.
Thus, this scheme is suitable for investors looking to build high quality debt portfolio with moderate to high risk appetite and a long investment horizon that aligns with the fund’s portfolio duration.
This article first appeared on PersonalFN here
