Nippon India Dynamic Bond Fund 

Fixed Income Market Update: 

Over the past few months fixed income markets witnessed a slew of events with continued liquidity support from RBI, the announcement of additional gross market borrowing by the central government, new 10 Yr G-Sec auction, the fiscal stimulus package, and finally the bi-monthly monetary policy. 

Going forward in Q2 FY 2021, adaptability and flexibility will define the new normal to acclimatize to constantly changing domestic & global dynamics. From the market’s perspective, an accommodating policy stance with easy liquidity conditions is expected to persist for a sufficiently long period.

The market is confident of timely RBI support in the form of conventional and unconventional measures to assuage market apprehension and provide financial stability. With the demand-supply situation under control, ample liquidity, benign international crude oil prices as well as lower global bond yields, we will continue to see robust demand in fixed income assets going ahead. 

Factors to consider in the current market: 

• Liquidity & Safety are two important criteria one should look for before investing in a market like this, where the only certain thing is uncertainty!! 

• G-Sec & SDL of markets are the most liquid and the safest in terms of credit profile. 

• From a Risk-Return perspective, G-Secs / SDLs are may be attractive. Annualized yields of SDL & G-Secs are higher than Bank FD rates. In addition, the bonds may provide marked-to market appreciation in a bond-positive environment. 

• In an uncertain market, the revenue collection has taken a big hit, hence State governments have also resorted to additional borrowing. Due to this, we have seen the spread between SDL & G-Sec is at quite attractive levels. 

• Conservative investors can invest in funds that take exposure predominantly in G-Sec Bonds & SDLs offering attractive spreads. One can expect gross returns in the range of 6.60-6.70% over the period of 10 Years 

Introducing Nippon India Dynamic Bond Fund: 

A fund with a 10-year roll down strategy with investments in State Development Loans (SDLs), which will invest predominantly into State Development Loans (SDLs). The fund also is enabled to invest in PSU Bonds, at appropriate times.

Rating Profile: Mostly Sovereign Rating (tactical exposure to AAA PSU Bonds) and maintain an Avg maturity of 10-10.5 years and would gradually roll-down the duration as we go along. The Fund aims to capture the prevailing yields in SDLs available in assets maturing in CY 2030 and run a modified duration of 6.5 – 7 Years. The Portfolio would roll down in terms of maturity over a period of time and in the current market context, the Fund intends to invest only in a range of liquid SDLs 

What are SDLs? 

Bonds or dated securities issued by State Governments are called the State Development Loans (SDLs). Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. Like G-sec, SDLs qualifies for the Statutory Liquidity Ratio (SLR) of banks. They are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF). 

Why 10 Years SDL? 

• Yield levels have become quite attractive in the current market scenario, making it a compelling case to lock-in current levels. This can be achieved with this proposed 10 years roll down the structure. 

• Further, the open-ended nature of the fund would offer better flexibility than closed-ended funds with similar tenure in terms of portfolio construction, hence enhancing the return profile of the fund, while offering ongoing liquidity. This also helps in reducing the reinvestment risk of the coupons received from time to time. 

Fund Outlook:

Considering the market context, we believe that this portfolio construct, along with roll-down benefit offers a viable proposition for adding duration to the portfolio, while at the same time capping the overall volatility in returns over the medium term. The open-ended nature of the fund would offer better flexibility than closed-ended funds in terms of portfolio construction, hence enhancing the return profile of the fund, while offering ongoing liquidity. 

The benefit of Rolldown: 

Roll down minimizes the volatility in return, provided you have the horizon to hold it till the intended ‘maturity’ period. The advantage of locking in very long maturity SDL yields is that you are buying into today’s available interest rates for a long horizon. As the economy grows over the period of time, interest rates are expected to ease. With rolldown benefits, you can have visibility in returns. 

Who should Invest? 

• Ideal for investors who are looking for a product similar to fixed deposits / FMPs with an investment horizon of 10 years with the added benefit of open-ended nature of the fund 

• Investors having an investment horizon of 5-10 years. 

• The product compares very well with and maybe better than, traditional investments such as Long-Term FDs, RBI Bonds, and Tax-free Bonds. 

Investors who want to invest in a sovereign rated portfolio and seeking higher post-tax returns may consider the product.

Disclaimer:The information hereinabove is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations, or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, affiliates or representatives (“entities & their affiliates”) do not assume any responsibility for or warrant the accuracy, completeness, adequacy, and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive, or exemplary damages, including on account of lost profits arising from the information contained in this material. The recipient alone shall be fully responsible for any decision taken on the basis of this document. 

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. 

Author: Prashant Pimple Senior FM- Fixed Income, Nippon Ind

Published: Investor's India Magazine, August 2020 Edition