NFO Review: Baroda Pioneer Dynamic Bond Fund

A medium to long term income fund, aiming to benefit from the changing interest rate scenario

Summary

Type	Open-ended Debt scheme	Benchmark Index	CRISIL Composite Bond Fund Index
Min. Investment: Additional Investment: SIP:	Rs 5,000 & in multiples of Re 1thereafter Rs 1,000 & in multiples of Re 1 Monthly Option: Rs 1,000 and in multiples of Re 1 thereafter; Quarterly Option: Rs 1,500 and in multiples of Re 1 thereafter	Face Value	Rs 10 per unit
Entry Load	Nil	Exit Load	0.50% if redeemed within 3 months from the date of allotment of units Nil, if redeemed after 3 months from the date of allotment of units thereafter
Issue Opens	June 22, 2012	Issue Closes	June 27, 2012

Investment Objective*

The primary investment objective of the scheme is to generate returns with liquidity by managing the portfolio dynamically through interest rate cycles. There is no assurance or guarantee that the investment objective of the Scheme would be realized.

(Source: Scheme Information Document)

Is this fund for you?

Dynamic bond funds are similar to income funds, which have debt papers with medium to long-term maturity profile. However, dynamic bond funds, due to the flexibility imbibed in their investment mandate are free to invest in fixed income instruments across maturities, taking a view of the interest rate scenario. To simply put, they can invest in a mix of short-term as well as long-term debt instruments. These funds emphasize on generating attractive returns in the long-term by riding the entire interest rate cycle, while evading interest rate volatility over a period of time. Having said that, medium to long-term income funds are sensitive to interest rates and thus do witness high volatility typically in the rising interest rate scenario; however the impact of the fluctuation fades out over a period of time. These funds are ideal for parking medium to long-term investible surplus preferably in the constant and falling interest rate scenario.

Baroda Pioneer Dynamic Bond Fund (BPDBF) is one such medium to long-term income fund from the stable of Baroda Pioneer Mutual Fund. Baroda Pioneer Mutual Fund is an established player in the Indian mutual fund industry having well laid investment processes and systems. The fund house has proven its mettle in the debt mutual fund space but has not made significant impact on the equity side.

The timing of the launch of this fund seems quite appropriate as interest rates are likely to move gradually move southwards. BPDBF is positioned to invest across all classes of debt and money market instruments with no cap or floor on maturity, duration or instrument type concentrations. The Fund manager will dynamically manage the fund’s portfolio maturity profile based on the prevailing interest rate scenario and conditions in the debt market.

Portfolio Strategy

BPDBF would follow an active investment strategy structured in a manner that offers investors the advantage of benefitting from different interest rate scenarios. The fund will primarily invest in CPs, CDs, Treasury Bills and short term debt instruments issued by various Corporates, Government – State or Central, PSUs. But apart from this, BPDBF will also invest in unrated debt instruments not exceeding 10% of the Net Asset Value.

Being a dynamic bond fund, the fund manager will have the flexibility to alter the duration of the portfolio through reallocation of its funds into different asset classes within the fixed income group. The portfolio of the scheme will function dynamically based on two parameters – duration reset & asset class switch. Based on these two parameters, the portfolio manager would look to continuously capture positive price movements and minimize the impact of adverse asset prices.

BPDBF’s portfolio based on duration reset & asset class switch

Scenario	Duration Reset	Asset class switch
Rising Interest rate	Lower the duration of the portfolio to minimise risk of capital loss. Normally duration of the portfolio would be maintained at less than 1 year	Switch assets significantly to Money Market Instruments
Decreasing interest rate	Maintain a high duration to maximise opportunities for capital gains. Typically duration of the portfolio would be maintained at more than 3 years	Switch assets to long term Corporate Bonds, G-Sec, etc., from Money Market Instruments
Stable interest rate	Manage the duration to maximise the risk adjusted return (i.e. lower interest rate risk and above average returns). Typically duration of the portfolio would be maintained between 1 to 3 years	Switch assets to medium term Corporate Bonds and/or lower exposure to Money Market Instruments

(Source: Scheme Information Document)

Asset Allocation Pattern

Asset Class	Allocation Range
Debt Instruments with residual maturity greater than 1 year	1%-100%
Money Market Instruments and Debt Instruments with residual maturity upto 1 year	0%-99%

(Source: Scheme Information Document)

Fund Manager Profile

The fund will be managed by the duo, Mr Alok Sahoo and Ms Hetal Shah.

Mr Alok Sahoo is the Head - Fixed Income at Baroda Pioneer Mutual Fund. He is a management graduate in Finance from XIM, Bhubaneswar and holds engineering degree (BE) from NIT, Rourkela. Mr. Sahoo brings with him over 10 years of experience in the asset management industry. Prior to joining Baroda Pioneer Mutual Fund, he was fund manager - fixed income at UTI Mutual Fund and fund manager - fixed income & EPF at HSBC Mutual Fund.

At present Mr Sahoo also manages Baroda Pioneer Liquid Fund, Baroda Pioneer Treasury Advantage Fund, Baroda Pioneer PSU Bond Fund, Baroda Pioneer Short Term Bond Fund and FMPs, along with Ms Hetal Shah.

Currently, Ms Shah manages Baroda Pioneer Liquid Fund, Baroda Pioneer Treasury Advantage Fund, Baroda Pioneer PSU Bond Fund, Baroda Pioneer Short Term Bond Fund and FMPs, along with Mr Alok Sahoo. Apart from this, she also manages Baroda Pioneer MIP Fund, Baroda Pioneer Gilt Fund and Baroda Pioneer Income Fund.
 

Fund Outlook

Given that BPDBF will adopt a dynamic approach of investment in debt and money market instruments with flexibility to invest across different maturity papers based on two parameters – duration reset & asset class switch and also the apt timing of the launch; it is theoretically well placed to benefit from the expected change in the interest rate scenario in the country. Currently the interest rate in India has almost peaked out and we may soon witness a cut in interest rates by the RBI. Also, income funds are an ideal avenue to park one’s medium to long term funds in a constant and falling interest rate scenario. This is because, in such a situation the yields may not move up further and start softening, which will boost the performance of medium to long term income fund as they gain from increase in bond prices.
 

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