SBI Corporate Bond Fund: A Worthwhile Proposition For The Medium Term?
Jan 28, 2019

Author: Aditi Murkute

(Image source: freepik.com; photo created by mindadi)

SBI Mutual Fund has launched SBI Corporate Bond Fund (SCBF), an open-ended debt scheme that will invest in corporate bonds predominantly.

As characterised by the capital market regulator, a corporate bond fund invests a minimum 80% of its assets in corporate bonds (only in highest rated instruments i.e. AA+ and above). The kind of duration the fund will hold is not specifically defined.

SCBF as per the mandate is expected to follow this allocation as per the regulator’s definition, besides invest  upto 20% in other debt instruments, Central and State Government(s) dated securities and money market instruments, and  upto 10% in units of REITs and InVITs

On the risk-return spectrum of debt funds, a corporate bond fund is relatively safe than a credit safe fund. If you wish to seek exposure to highest rate corporate bond, this category of debt mutual fund would be appropriate. However, you also ought to keep a close watch on the duration of a respective scheme. For a medium-term investment time horizon of 2 to 3 years, a corporate bond fund can be considered.

Table 1: NFO Details

Type
An open-ended debt scheme
 
Category
Corporate bond fund


Investment Objective


To provide the investors with an opportunity to predominantly invest in corporate bonds rated AA+ and above to generate additional spread on part of their debt investments from high-quality corporate debt securities while maintaining moderate liquidity in the portfolio through investment in money market securities.

However, there is no guarantee or assurance that the investment objective of the scheme will be achieved. The scheme doesn't assure or guarantee any returns.

Min Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Plans  • Direct

• Regular
Options
  • Growth (default option)

  • Dividend

    • Re-investment (default option)

    • Pay-out

    • Transfer

Entry Load Not Applicable Exit Load
  • For exit on or before 6 months from the date of allotment – 1.00%

  • For exit after 6 months from the date of allotment – Nil

Fund Manager
  • Mr Rajeev Radhakrishnan - Debt and Money Market Instruments.

  • Mr Mohit Jain - Foreign securities.

Benchmark Index NIFTY Corporate Bond Index
Issue Opens January 16, 2019 Issue Closes January 29, 2019
(Source: Scheme Information Document)

How will the SBI Corporate Bond Fund allocate its assets?

Under normal circumstances, the scheme’s asset allocation pattern will be as under:

Table 2: SCBF’s Asset Allocation

Instruments Indicative allocation (% of Net Assets) Risk Profile
Minimum Maximum

Corporate Bonds rated AA+ and above only
 

80

100
Low to Medium

Debt instruments other than above, Central and State Government (s) dated securities and Money market instruments
 

0

20
Low to Medium

Units of REITs and InVITs^
 

0

10
Medium to High
^The exposure will be in line with SEBI/AMFI limits specified from time to time.
The scheme may invest in securitized debt to the limit of 50% of its net assets.
The scheme may also invest in Derivatives like Interest rate swaps, Forward Rate agreements and other such instruments as permitted by RBI / SEBI. The scheme may invest in derivatives up to 100% of its net assets.
The Scheme shall not engage in Stock lending and short selling activities.
The Scheme may indulge in ‘Imperfect hedging’ using IRFs up to a maximum of 20% of the net assets of the scheme.
The scheme shall invest in repo in corporate debt. The scheme may invest in foreign debt securities to the limit of 50% of its net assets. The scheme may invest in units of mutual funds.
(Source: Scheme Information Document)


What will be the Investment Strategy of SBI Corporate Bond Fund?

The scheme aims to generate attractive returns through high-quality corporate debt securities which are rated AA+ and above. The performance will depend on the fund manager’s ability to accurately assess the financial position of the security issuers regarding paying off its debt.

A credit analysis will be followed using a bottom-up approach starting with looking at each individual issuer, industry, terms and covenants of an issue, etc. A team of credit analyst will do a detailed analysis and prepare an initiation note to introduce an issuer to the Accepted Credit Universe. For every issuer the focus will be on 4 Cs:

  • Credit

  • Capacity

  • Character

  • Collateral

While carrying out due diligences for credit risk, following parameters/attributes are analysed:

  • Management Quality

  • Financial Analysis

  • Business Analysis

  • Industry Analysis

  • Regulatory Environment

  • Feedback from Creditors

  • Other Issues; auditor report and qualifications, etc.

Once a credit limit is set, it is regularly monitored based on internal Tier classification.

The investments may be made in primary as well as secondary markets. The portfolio will be sufficiently diversified to minimize credit risk.

The Scheme being open-ended, some portion of the portfolio will be invested in money market instruments to meet the liquidity requirements.


Who will manage the SBI Corporate Bond Fund?

Mr Rajeev Radhakrishnan is the lead fund manager and shall manage investments in Debt and Money Market Instruments, while Mr Mohit Jain will manage investments in foreign securities in the Scheme.

Mr Rajeev Radhakrishnan has to his credit a bachelor’s degree in Production Engineering [B.E. (Production), an MMS degree (in Finance) and is a CFA (CFA Institute, USA).

He has a total experience of around 17 years in funds management and around 10 years in Fixed Income funds management and dealing. Before joining SBI Funds Management P. Ltd he was associated with UTI Asset Management Company Ltd. as the co-fund manager.

At the fund house, Mr Rajeev Radhakrishnan manages SBI Magnum Children's Benefit Fund, SBI Short Term Debt Fund, SBI Magnum Ultra Short-Term Debt Fund, SBI Magnum Low Duration Fund, SBI Dual Advantage Fund – Series I to XXIX (Debt portion), SBI Banking & PSU Fund and SBI Debt Fund Series.

Mr Mohit Jain is the dedicated fund manager for managing overseas investments of the Schemes of the Fund which have a mandate to invest in overseas securities.


The outlook for SBI Corporate Bond Fund

SBI Corporate Bond Fund carries liquidity risks, interest rate risk, credit risks and reinvestment risk among others. To mitigate risk the fund house has necessary framework in place at an enterprise level. Diversification and hedging may help as a risk mitigation strategy.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

Factors such as inflation, the direction of policy rates, currency movement, fiscal deficit, and the consequent impact on yields, plus the ratings assigned to debt papers held in the portfolio, etc. will weigh on the potential performance of the scheme.

How the fund managers construct the portfolio to deal with the risk that could weigh down the performance remains to be seen. The fortune of the fund will be ultimately linked to the quality of corporate bonds, debt papers and money market instruments held in the overall portfolio.

[Read: Skip NFOs, Instead Consider Building A Strategic Mutual Fund Portfolio]

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