The debt market has suffered with downgrades and defaults in the past few years. Many conservative investors discontinued investing in debt schemes because they were worried about getting back their money. If you are looking for relatively safer debt funds to invest in, you may consider investing in banking & PSU debt funds.
Banking & PSU debt schemes are ‘relatively’ safe because they invest only in securities issued by banks, government-backed entities and PSUs. These schemes are mandated by SEBI to invest at least 80% of their corpus in debt investments of banks, public sector undertakings, and public financial institutions.
Since the majority of these organisations are backed by or owned by the government, there is zero credit risk. However, this doesn’t mean that these schemes do not have any risk at all. For example, these schemes also invest in papers issued by private banks. Since they don’t have government backing, they carry some risk. Additionally, these schemes may suffer from changes in interest rates.
Due to the worldwide focus on controlling inflation through sharp rate hikes and liquidity withdrawal, the markets are anticipated to remain volatile. The RBI’s emphasis on containing inflation while keeping an eye on growth may calibrate subsequent rate actions in future. Thus, in the prevailing fixed income market conditions, it is prudent for conservative debt investors to invest in a portfolio of AAA-rated high credit quality securities that carry relatively low risk.
Canara Robeco AMC is India’s 2nd oldest asset manager in existence since 1993. It has 90 years of rich experience in pure research-driven assets and rigorous management. Given the experience in managing debt portfolios with high credit quality papers and with low credit risk, Canara Robeco Mutual Fund has launched Canara Robeco Banking and PSU Debt Fund. It is an open-ended debt scheme predominantly investing in debt instruments of banks, public sector undertakings, public financial institutions and municipal bonds.
Table 1: Details of Canara Robeco Banking and PSU Debt Fund
| Type | An open-ended debt scheme predominantly investing in debt instruments of banks, public sector undertakings, public financial institutions and municipal bonds. A relatively high-interest rate risk and moderate credit risk. | Category | Debt Fund |
| Investment Objective | To generate income and/or capital appreciation through a portfolio of high-quality debt and money market instruments issued by entities such as Banks, Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs) and Municipal Bonds. However, there is no assurance that the objective of the fund will be realised. | ||
| Min. Investment | Rs 5,000/- and multiples of Re. 1 thereafter. Additional Purchase Rs 1,000/- and 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 Avnish Jain | Benchmark Index | CRISIL Banking and PSU Debt Index |
| Issue Opens: | July 29, 2022 | Issue Closes: | August 12, 2022 |
(Source: Scheme Information Document)
The investment strategy for Canara Robeco Banking and PSU Debt Fund will be as follows:
Canara Robeco Banking and PSU Debt Fund will predominantly invest in debt and money market instruments of banks, public sector undertakings, public financial institutions and Municipal Bonds.
The scheme will follow an active interest rate management strategy and aim to generate income and/or capital appreciation through a portfolio of high-quality debt and money market instruments consisting predominantly of securities issued by entities such as Banks, Public Sector Undertakings (PSUs) and Public Financial Institutions (PFIs) and Municipal Bonds. Investments in central and state governments may be undertaken for active duration management.
The general maturity/Macaulay Duration range for the portfolio about the market based on its interest rate outlook will be arrived at after rigorous and close monitoring of various macro variables. The shifts within this range are then determined by short-term cyclical trends in the economy. Depending upon prevailing market conditions & interest rate scenarios, the portfolio Macaulay Duration and average maturity can be increased or decreased. In case of a rising interest rate environment, the Macaulay Duration/average maturity of the scheme may be reduced whereas in a falling interest rate scenario the holding in medium / long securities may be maximized.
The fund manager will actively monitor the prevailing political conditions, economic environment (including interest rates and inflation etc.), the performance of the corporate sector and general liquidity as well as other considerations in the economy & markets to assess the likely direction of interest rates and to position, the portfolio appropriately to take advantage of the same.
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation for Canara Robeco Banking and PSU Debt Fund
| Instruments | Indicative Allocation (% of net assets) | Risk Profile | |
| Minimum | Maximum | High/Medium/Low | |
| Debt and Money Market Instruments issued by Banks, Public Financial Institutions (PFIs), Public Sector Undertakings (PSUs) and Municipal Bonds | 80 | 100 | Low to Medium |
| Debt (including securities issued by Central and State Governments) and Money Market Instruments issued by entities other than Banks, PFIs, PSUs and Municipal Bonds | 0 | 20 | Low to Medium |
| Units issued by REITs and InvITs | 0 | 10 | Medium to High |
(Source: Scheme Information Document)
Who will manage Canara Robeco Banking and PSU Debt Fund?
The designated fund manager for this scheme is Mr Avnish Jain. His qualification includes PGDM – IIM, Kolkata and B.Tech (Hons) – IIT Kharagpur and has an overall experience of 28 years in the financial services industry. Prior to joining Canara Robeco AMC, he was associated with ICICI Prudential Asset Management Company Ltd as Senior Fund Manager, Deutsche Asset Management (India) Private Limited as Head of Fixed Income, Professional Services with Misys Software Solutions (I)Ltd as Senior Consultant, Yes Bank Ltd as Head of Trading, ICICI Bank Ltd as Senior Trader – Proprietary Trading and UTI Securities Ltd as Research Analyst.
At Canara Robeco Mutual Fund, Mr Jain currently manages Canara Robeco Corporate Bond Fund, Canara Robeco Equity Hybrid Fund, Canara Robeco Conservative Hybrid Fund, Canara Robeco Income Fund, Canara Robeco Liquid Fund, Canara Robeco Ultra Short Term Fund, Canara Robeco Savings Fund, Canara Robeco Dynamic Bond Fund and Canara Robeco Gilt Fund.
Fund Outlook – Canara Robeco Banking and PSU Debt Fund
Canara Robeco Banking and PSU Debt Fund seek to generate optimal returns by investing in debt and money market instruments issued primarily by banks, public financial institutions (PFIs), public sector undertakings (PSUs) and municipal bonds.
The scheme aims to manage duration and capture opportunities in the interest rate cycle and mispricing on the yield curve. The scheme endeavours to maintain a high credit quality portfolio thus providing a higher liquidity benefit by investing in high-grade assets that are government-backed entities or systematically important private banks/entities. This potentially provides lower credit risk
The Banking and PSU debt funds segment has performed well and generated higher returns in the last few years compared to other debt funds. These funds offer significantly better returns than fixed deposits that too in a short duration. The scheme being actively managed, the fund manager’s ability to construct the debt portfolio remains to be seen.
Although the scheme provides exposure towards bonds issued by banks and PSUs and other government-backed securities with low credit risk, it is still prone to interest rate risks. The recent 50 basis point increase in interest rates by the RBI maintains the rising interest rate environment which is unfavourable for debt funds. However, since this scheme does not invest in long-duration papers, it will be relatively better off. 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 investors should be prepared for some volatility. These factors among others may have an adverse impact on the scheme’s performance.
Thus, this scheme is suitable for investors with low to moderate risk appetite seeking to invest in high credit quality bonds with good liquidity. Ensure that you have an investment horizon that aligns with the fund’s portfolio duration.
This article first appeared on PersonalFN here
