Investments in debt market generally have reduced volatility over longer tenures compared to equity markets. Long-duration investment can offer market-linked returns with a competitive alternative to traditional annuity products. However, long-duration debt funds are sensitive to changes in the interest rate and are more volatile than other categories of debt funds. Investors who are comfortable with fluctuating interest rates in the market may consider investing in long-duration debt funds.

Axis Mutual Fund has launched Axis Long Duration Fund, it is an open-ended debt scheme investing in instruments such that the Macaulay duration of the portfolio is greater than 7 years. Relatively High interest rate risk and Relatively Low Credit Risk. Commenting on the fund, Mr Chandresh Nigam, MD & CEO of Axis AMC, said, “Fixed income strategies have the potential to be an attractive option for investors, especially those in the middle of their career lifecycle and wish to plan for post-retirement.”

Table 1: Details of Axis Long Duration Fund

Type An open-ended debt scheme investing in instruments such that the Macaulay duration of the portfolio is greater than 7 years. Relatively High interest rate risk and Relatively Low Credit Risk Category Debt Scheme – Long Duration Fund
Investment Objective The primary investment objective is to generate optimal returns consistent with moderate levels of risk. This income may be complemented by a capital appreciation of the portfolio. Accordingly, investments shall predominantly be made in Debt & Money Market Instruments. However, there can be no assurance or guarantee that the investment objective of the scheme would be achieved.
Min. Investment Rs 5,000/- and in multiples of Re 1 thereafter. Additional Purchase Rs 1,000/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
  • Direct
  • Regular
  • Growth
  • Income Distribution Cum Capital Withdrawal (IDCW)
Entry Load Not Applicable Exit Load Nil
Fund Manager – Mr Devang Shah
– Mr Kaustubh Sule
– Mr Hardik Shah
Benchmark Index NIFTY Long Duration Debt Index A – III
Issue Opens: December 07, 2022 Issue Closes: December 21, 2022

(Source: Scheme Information Document)  

What will be the investment strategy for Axis Long Duration Fund?

Interest rates have a cyclical movement, whereas yields fall and bond prices rise, while the reverse is true in the case when interest rates rise. Axis Long Duration Fund aims to maximise risk-adjusted returns to the investor through active portfolio management by elongating the portfolio’s duration in a falling interest rate scenario and reducing the duration when interest rates are moving up.

With the discretion to take aggressive interest rate/duration risk calls, this could mean investing the entire net assets in long-dated Government securities and debt instruments (carrying relatively higher interest rate risk/duration risk) or on defensive considerations, entirely in money market instruments. Accordingly, the scheme’s interest rate risk/duration risk may change substantially depending upon the fund’s call.

The fund managers will carry out rigorous, in-depth credit evaluations of the money market and debt instruments proposed to be invested in. The credit evaluation will essentially be a bottom-up approach and include a study of the operating environment of the issuer, the past track record as well as the future prospects of the issuer and the short-term/long-term financial health of the issuer.

Table 2: Asset Allocation for Axis Long Duration Fund

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Debt Instruments & Money Market Instruments* 0 100 Low to Medium

* Investment in securitised debts shall not exceed 50% of the net assets of the Scheme.

(Source: Scheme Information Document)  

Should you invest in Axis Long Duration Fund?

Axis Long Duration Fund will predominantly invest in sovereign securities with Macaulay Duration greater than 7 years to generate optimal returns while maintaining the 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 scheme will buy assets with similar maturity characteristics to mitigate duration-related risks. It offers investors an opportunity to invest at the peak of the interest rate cycle, thereby allowing them to lock in long-term rates. 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 increases, the bond value decreases. When one invests for a long period in debt instruments, the investor goes through an interesting cycle that has an upward and downward phase. Even a minor hardening of the interest rate could make the scheme highly risky and volatile.

It is difficult to predict interest rate movements. In case there are adverse developments such as a worsening geopolitical scenario, rising inflation, and a massive increase in government borrowings, bond yields can go up further. In that case, investments in long-duration products will suffer. Given that, the recent hike in RBI’s policy repo rates again by 35 bps to curb the rising inflation may cause the debt market to be volatile in the near term. The interest rate risk amidst the dynamic market conditions is likely to affect the scheme’s performance.

This article first appeared on PersonalFN here

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