IDFC SSIF- Medium term:Best of Both Worlds
(Quality Credit & G-Sec Participation)
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· The fund is anactively managed fund and invests in a mix of debt and money market instruments
· The fund prefers to taketactical G sec exposure maximum up to 25% of the portfolio
· The overall average maturity of the fund is ordinarily capped at4 years
· MT is best suited for investors who wantmoderate participation. The low average maturity makes the fund well suited to offer lower volatility yet benefit from potential fall in interest rates
As the fund prefers to keep short to medium term average maturity, the risk is typically lower than a long duration product.
Between 2011 to 2013, owing to the structural bear markets for rates, the portfolio approach was to take account of seasonality triggers to generate alpha. In the lean season of credit between March to September, shorter end of the yield curve were preferred. From October to March, relatively longer end was preferred as OMOs and low net supply favoured this part of curve.
Given that we have been structurally positive on rates since second half of 2014, SSIF-Medium Term has taken increased exposure in G sec (maximum upto 25%). The Gilt exposure aids the accrual income over time by generating capital gains.
Source: MFI
IDFC SSIF-MT offers the investor a superior quality portfolio as it does not typically participate in below AA papers.
Source: MFI
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Debt Quants Maturity Bucket
Investors over the past many years have been used to thinking FMPs and money market funds when they think fixed income. This has largely worked as in a rising rate environment the lowest maturity product should do the best. Also, owing to the same environment, there never was any real fear of 'reinvestment risk'. Thus, every year maturing FMPs would always deliver a sufficiently attractive reinvestment option which was almost always as much or more than a short term or long term bond fund could consistently deliver. Bond funds, in turn, were used tactically.
Given our view of a structural case for fall in inflation and thereby earn real positive interest rates, it is important to start thinking of reinvestment risk as a real, tangible risk that one needs to hedge. We believe, investors should start looking at bond funds (whether short or medium or long would depend upon investment objectives and risk appetite) as a means of hedging.
SSIF-MT offers a best fit to those who are not too keen at having a large exposure to duration (possibly due to lack of appetite to volatility) and have a short-to-medium investment horizon. As mentioned earlier, the fund typically prefers to keep average maturity below 4 years and therefore would have only moderate duration risk.
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