HDFC Corporate Debt Opportunities Fund
Mar 19, 2014

Author: PersonalFN Content & Research Team

HDFC Corporate Debt Opportunities Fund

A fund that endeavours to generate regular income and capital appreciation by investing predominantly in corporate debt.

Summary

Type	An open-ended debt scheme	Benchmark Index	CRISIL Short Term Bond Fund Index
Min. Investment:	For Lumpsum -> Rs 5,000 per application and any amount thereafter For Systematic Investment Plan (SIP) Monthly Option: Rs 500 and in multiples of Rs 100 thereafter Quarterly Option: Rs 1,500 and in multiples of Rs 100 thereafter For Systematic Transfer Plan (STP) - > The scheme offers 2 options under this namely the Fixed Systematic Transfer Plan (FSTP) (with daily, weekly, monthly and quarterly frequency) and Capital Appreciation Systematic Transfer Plan (CASTP) (with monthly and quarterly frequency). The minimum instalment under each of these plans is as follows: - Daily FSTP: - 12 instalments where the amount is less than Rs 1,000 while 6 instalments where the amount is equal to or greater than Rs 1,000 - Weekly FSTP, Monthly FSTP & Monthly CASTP: - Minimum 6 instalments - Under Quarterly FSTP & Quarterly CASTP: - Minimum 2 instalments Further, the the minimum balance in the Unit holders account or the minimum amount of application at the time of enrolment for STP in the Transferor Scheme should be Rs 12,000.	Options offered:	Growth Option Dividend Option
Face Value	Rs 10 per unit	Expense Ratio:	Upto 2.25%
Entry Load	Nil	Exit Load:	- 2% if the units are redeemed / switched-out within 12 months from the date of allotment - 1% if the units are redeemed / switched-out after 12 months but within 18 months from the date of allotment - Nil if units are redeemed / switched-out after 18 months from the date of allotment
Issue Opens	March 06, 2014	Issue Closes:	March 20, 2014

Investment Objective*

The investment objective of the Scheme is to generate regular income and capital appreciation by investing predominantly in corporate debt.

*Source: Scheme Information Document

Is this fund for you?

HDFC Corporate Debt Opportunities Fund (HCDOF) is an open-ended debt income scheme from the stable of HDFC Mutual Fund, which would be investing a dominant portion of its assets in corporate debt instruments (including securitised debt) such as non-convertible debt securities, debentures, bonds, zero premium notes, Pass Through Certificates (PTCs) etc. and the rest in money market instruments. While playing the interest rate cycles and taking exposure across the yield curve, HCDOF shall not exceed a modified duration of 5 years. So it could be said that HCDOF would manage its portfolio dynamically, but restricting the modified duration as aforementioned.

As many of you may be aware, yields of long-term debt papers after remaining elevated for quite some time have mellowed down aided by macroeconomic factors such as:

Confidence exuded by the finance minister in the interim budget 2014 that the fiscal deficit would be contained at 4.6%, below the budgeted estimates of 4.8% for the fiscal year 2013-14;
CAD having narrowed down;
Both WPI and CPI inflation having mellowed and placed near the comfort level of RBI; and
Adequate liquidity in the system

While economic growth is yet languishing, the capital markets have already discounted the same. So the risk at the medium term of the yield curve seems to have receded. But having said that, with imminent inflationary pressures led by unseasonal winter rainfall, hailstorms witnessed by some parts of the country and chances of an El-Nino phenomenon; could turn out to be spoilers due to a probable damage to rabi crop produce, which may infuses the risk of pushing food inflation upwards.

Likewise the longer end of the yield curve could yet see some volatility. This is because the fiscal deficit has already run-up further to 101.6% of the revised estimated in the first 10 months of the fiscal year due to slower revenues and large fund releases; which could lead to the derailment from the fiscal deficit target set by the Government. Global rating agencies have already signalled that India’s fiscal deficit situation remains weak and if does not improve, the country’s sovereign rating could be downgraded.

Thus only if the macroeconomic variables all fall in place as estimated, the environment seems conducive for HCDOF to build its portfolio.

However HCDOF would be suitable only for those investors who have an investment horizon of at least 3 to 5 years. Also, given the dynamic macroeconomic environment, such investors would be better-off holding not more than 20% in longer tenure debt mutual funds.

Portfolio & Investment Strategy

In the endeavour to meet its investment objective HCDOF will invest in Corporate Debt Securities and Money Market Instruments with maturities across the entire range of the yield curve to take advantage of various interest rate scenarios. Since corporate debt normally trade above government securities, the Scheme aims to benefit from the spreads over the Government Securities. Moreover, the modified duration of the portfolio shall not exceed 5 years.

As a part of the credit evaluation policy at the fund house, the factors which will be considered while building the portfolio are as under and the fund house will utilise the ratings of recognised rating agencies as an input in the credit evaluation process.

Parentage
Quality of management
Outlook on the sector
Overall financial strength and credit

Also interest rate scenario analysis would be performed on an on-going basis, considering the impact of the developments on the macro-economic front and the demand and supply of funds. Also the fund house would try to reduce the liquidity risk by investing in securities that would result in a staggered maturity profile of the portfolio, investment in structured securities that provide easy liquidity and securities that have reasonable secondary market activity.

Moreover, the scheme may also use derivative instruments (not exceeding 20% of the net assets) based on the opportunities available for hedging and portfolio balancing.

It is noteworthy that investing in debt instruments carries various investment risks such as interest rate risk, liquidity risk, default risk, re-investment risk, etc. While they cannot be done away with, they can be minimized by diversification and effective use of hedging techniques.

Under normal circumstances the asset allocation pattern for the scheme will be as under:

Instruments	Indicative Allocation (% of Net Assets)		Risk Profile (Low / Medium / High)
Instruments	Minimum	Maximum	Risk Profile (Low / Medium / High)
Corporate debt (including securitised debt #)	80	100	Low to Medium
Money market instruments	0	20	Low

#Note: Investment in securitised debt shall not exceed 50% of the portfolio.
(Source: Scheme Information Document)

HCDOF will benchmark its performance against the Short Term Bond Fund Index. The said index tracks the performance of the debt portfolio that includes Government securities, AAA/AA rated corporate bonds, Commercial Papers and Certificates of Deposit.

Fund Manager Profile

The fund will be managed by Mr Shobhit Mehrotra who has collectively over 20 years of experience in fixed income and credit ratings. Prior to HDFC Mutual Fund in 2004, Mr Mehrotra has worked with Templeton Asset Management (India) Pvt. Ltd as an Associate Vice President (AVP) & Portfolio Manager for fixed income securities. He has to his credit a degree in textiles (B. Text) and a MBA from Clemson University (USA). At HDFC Mutual, Mr Mehrotra also manages HDFC Monthly Income Plan (Debt Assets), HDFC Income Fund, HDFC High Interest Fund (Short Term Plan), HDFC Floating Rate Income Fund, HDFC Medium Term Opportunities Fund, HDFC Liquid Fund and some series of the Fixed Maturity Plans (FMPs).

Fund Outlook

As mentioned earlier, HCDOF is launched at a time when the yields at the longer end of the yields curve have a softened a little after remaining elevated for quite some time. But yields at the shorter end of the yield curve have remained rather flat and elevated at about 9.00%. Addressing to the contraction in liquidity amid the recent advance tax outlflow, RBI announced a buyback of Government securities worth Rs 15,000 crore along with a planned Rs 50,000 crore infusion through repo auction. So there is an aggregate liquidity worth Rs 65,000 crore being infused in the system and with Rs 30,000 crore repo maturity having coincided in the interim, Rs 35,000 crore funds have been left in the system.

But the worry remains from fiscal deficit, rating downgrades and imminent inflationary pressures. With the fiscal deficit already run-up further to 101.6% of the revised estimated in the first 10 months of the fiscal year (due to slower revenues and large fund releases), the chances of Government missing its ambitious number for the fiscal deficit appears likely. This therefore exposes the country to a sovereign rating downgrade as well, due concerns expressed on the fiscal situation by global rating agencies. As far as inflation is concerned, while it has mellowed and moderated, the unseasonal winter rainfall and hailstorms witnessed by some part of the country, along with chances of El-Nino phenomenon could instil inflationary pressures on account of probable damage to rabi crop produce.

Speaking about economic growth data, as per the latest estimates of Central Statistics Office (CSO), it is expected that GDP would grow at 4.9% in the FY 2013-14. However, looking at the growth numbers so far over the past 3 quarters, it has become increasingly difficult to attain the full year growth estimates. For the GDP to attain revised full year target of 4.9%, Q4 has to witness growth of 5.7%, which looks difficult. But despite a subdued GDP growth rate, the impact of the same on the Indian debt market would be limited, as lower growth rate is already factored in. The political landscape ahead of general election 2014 would set the tone and activity in the Indian debt market.

So given the aforesaid, the shorter end of the yield curve would provide a favourable opportunity to HCDOF to build its portfolio, but the longer end of the yield curve could yet see some volatility.

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