Franklin Templeton Mutual Fund and Mirae Asset Mutual Fund Launch Long Duration Funds: Should You Invest?

At a time when interest rates in the Indian economy almost seem to have peaked, two fund houses -- Franklin Templeton Mutual Fund and Mirae Asset Mutual Fund -- have launched Long Duration Debt Funds.

So, when we speak about 'duration' funds there are three facets to them: average maturity of the underlying debt papers, coupon payment, and the yield.

Duration measures the fund's sensitivity to change in the interest rates. Long-duration debt papers have a high sensitivity to interest rates. Debt funds holding instruments with longer maturities, usually tend to fare well when interest rates are at the peak and expected to fall going forward. When yields are high, it unlocks capital growth. This is because yields and bond prices share an inverse relation.

In the last bi-monthly monetary policy meeting held on October 9, 2024 (before the CPI inflation data for October 2024 was released), assessing the risks stemming from uncertainties relating to the escalating global geopolitical scenario, financial market volatility, adverse weather events and the recent uptick in global food and metal prices, the RBI maintained a status quo on the policy repo rate for the tenth time in a row (after having increased the policy repo rate by 250 basis point from May 2022 to February 2023).

However, it is important to mention that the stance of the monetary policy has been changed to 'neutral' from the earlier 'withdrawal of accommodation'. The six-member Monetary Policy Committee (MPC) has unanimously resolved to remain unambiguously focused on a durable alignment of inflation with the target while supporting growth.

The recent headline Consumer Price Index (CPI) inflation for October 2024 has come in at 6.21% (a 14-month high) from 5.49% in the previous month, surpassing the RBI's target range of 2-6%. This was mainly due to higher inflation in food and fuel. Even the core inflation -- which excludes food and fuel -- also rose to a 10-month high of 3.70% in October 2024 versus 3.50% in the previous month.

Against this backdrop, it looks unlikely that the RBI will reduce the policy interest rates in the upcoming policy in December 2024 (even though many other major central banks have cut rates).

If CPI inflation comes down, perhaps the February 2025 bi-monthly monetary policy the RBI may cut the policy rates or may even give it a miss and consider cutting rates in the fiscal year 2025-26.

With rates mostly likely to head downwards, two New Fund Offers (NFOs) are launched: Franklin India Long Duration Fund and Mirae Asset Long Duration Fund.

These are open-ended debt mutual fund schemes available for subscription duration the period from November 21, 2024, to December 3, 2024. Thereafter they will re-open for continuous sale and repurchase on December 9, 2024.

What is a Long Duration Fund?

As per SEBI, a Long Duration Fund is mandated to invest in debt and money market instruments such that the Macaulay Duration (MD) of the portfolio is greater than 7 years. They invest across debt papers viz. corporate bonds/debentures, government securities, and money market instruments.

What is Macaulay Duration?

The Macaulay Duration, named after Frederick Macaulay, is the weighted average term-to-maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price.

MD provides an estimate of the volatility or sensitivity of the market value of a bond or portfolio of bonds to changes in interest rates.

What is the Investment Objective of a Long Duration Fund?

The investment objective of a Long Duration Debt Fund is to seek to generate returns through an actively managed diversified portfolio of debt and money market instruments such that the Macaulay Duration (MD) of the portfolio is greater than 7 years.

However, there is no assurance that the investment objective of the Scheme will be realised, and the Scheme does not assure or guarantee any returns.

What is the Investment Strategy of a Long Duration Fund?

To achieve the stated investment objective, Long Duration Funds pursue an active style of fund management to generate income while aiming to achieve an optimal balance between yield, safety and liquidity.

Investments are in various debt and money market instruments such that Portfolio's Macaulay duration is greater than 7 years. The debt securities could be issued by corporate (both private sector and public sectors) including banks and financial institutions, government securities, and money Market Instruments across maturities/yield curve and credit ratings. The investments are made to optimise the risk-adjusted returns.

The interest rate view and the duration strategy are guided by various factors affecting the domestic and global macro environment. So, there is a top-down approach followed as regards the interest rate view and sector allocation, while a bottom-up approach is followed for the security/instrument selection for the credit quality of the portfolio.

Both, Franklin India Long Duration Fund and Mirae Asset Long Duration Fund, follow a similar investment strategy.

Keep in mind that, investment in debt instruments carries various risks such as interest rate risk, reinvestment risk, credit risk and liquidity risk. Whilst such risks cannot be eliminated, they may be minimised through diversification.

Benchmarking of Performance of Long Duration Funds

CRISIL Long Duration Debt A-III Index is the benchmark index with which the performance of Long Duration Funds is benchmarked.

CRISIL Long Duration Debt A-III Index seeks to track the performance of a debt portfolio that includes government securities, AAA-rated corporate bonds, Commercial Papers (CPs), and Certificate of Deposits (CDs).

This benchmark is in accordance with clause 1.9 of SEBI Master Circular dated June 27, 2024, on 'Guiding Principles for bringing uniformity in Benchmarks of Mutual Fund Schemes' and has been selected from amongst those notified by AMFI as the first-tier benchmark.

Who Will Manage the Franklin India Long Duration Fund and Mirae Asset Long Duration Fund?

Franklin India Long Duration Fund will be co-managed by Ms Chandini Gupta and Mr Anuj Tagra.

Chandini has a total experience of 18 years holds a bachelor's degree in engineering (B.E) and is a Chartered Financial Analyst (from the CFA Institute, USA).

She is currently VP- Portfolio Manager Fixed Income at Franklin Templeton AMC. She joined Franklin Templeton AMC in March 2024 and before that was with ICICI Prudential Mutual Fund- AVP-Fund Manager, Fixed Income.

At present, she co-manages several debt mutual funds and hybrid funds with Anuj.

Anuj has a total experience of 17 years and has an MBA (Finance). He is also currently VP - Portfolio Manager, Fixed Income at Franklin Templeton AMC.

Before Franklin Templeton AMC, Anuj was also with ICICI Prudential Mutual Fund- AVP-Fund Manager, Fixed Income.

Speaking about the Mirae Asset Long Duration Fund, it will be managed by Ms. Kruti Chheta.

Kruti has over 10 years of experience in the fixed-income market and has to a credit a master's in management studies with a specialisation in Finance (MMS - Finance).

She has been associated with Mirae Asset Investment Managers (India) Private Ltd. for over 6 years as a fixed-income analyst. Her responsibilities as part of the investment team include leading the research for managing debt funds. Currently, she is also managing Mirae Asset Banking and PSU Fund.

Before joining the AMC, Kruti was associated with AK Capital and Shriram Wealth Advisors. At AK Capital, Kruti was a Fixed Income Analyst for the tenure of around a year in a client advisory role, assisting large pension funds with research on fixed-income investment opportunities. At Shriram Wealth Advisors, Kruti was a Research Analyst for a tenure of around 2 years advising Shriram Life Insurance Company.

How Much Is the Minimum Investment in Franklin India Long Duration Fund and Mirae Asset Long Duration Fund?

During the NFO period and ongoing basis, the minimum lump sum investment in both these Schemes is Rs 5,000/- and in multiples of Re. 1/- thereafter.

For the Systematic Investment Plan (SIP), the minimum SIP amount for Franklin India Long Duration Fund is Rs 500/-, but for daily SIP it is Rs 100/-.

For SIP in Mirae Asset Long Duration Fund, the minimum SIP amount is Rs 99/- and in multiples of Re.1/- thereafter.

Both Franklin India Long Duration Fund and Mirae Asset Long Duration Fund offer the Direct and Regular Plan and the Growth Option as well as the Income Distribution cum Capital Withdrawal (IDCW) for investors.

Who Should Consider Franklin India Long Duration Fund and Mirae Asset Long Duration Fund?

In general, Long Duration Funds owing to the maturity profile of the underlying portfolio, have a high sensitivity to interest rates. Indicatively, they are placed at the higher end of the risk-return spectrum.

That being said, Franklin India Long Duration Fund and Mirae Asset Long Duration Fund have been launched at an opportune time when interest rates in the Indian economy seem to have been almost at the peak, yields are elevated, and there is a good chance to unlock capital growth.

Franklin India Long Duration Fund would hold a diversified mix of Sovereign, high-quality corporate bonds, and money market instruments with a focus on portfolio liquidity while aiming for accrual income and potential capital gains.

The Mirae Asset Long Duration Fund also endeavours to invest in high credit quality debt papers, viz. G-secs, high-rated corporate bonds, and money market instruments in accordance with its investment mandate so as to provide stable returns over the long term.

Both these Schemes are from fund houses following robust investment processes & systems. However, Franklin Templeton has the record of abruptly shutting down six debt schemes in the past without notifying investors resulting in SEBI intervening in the matter later.

[Read: COVID-19 Related Disruption Causes Franklin Templeton Mutual Fund to Wind-down Six Debt Schemes]

Despite the setback, Franklin Templeton has shown a strong determination to rebuild its presence in the debt fund space. Franklin Templeton (India) has brought on board Mr Rahul Goswami, a veteran in the fixed-income domain, as its Chief Investment Officer (CIO) and Managing Director in 2023.

[Read: Franklin Templeton's Debt Fund Comeback: Second Chance or Revival Situation?]

Whichever Long Duration Fund you choose, ensure that you have a high-risk appetite and a longer time horizon of over 7 years.

To know more about Franklin India Long Duration Fund and Mirae Asset Long Duration Fund, read their Scheme Information Document (SID) carefully.

Be a thoughtful investor.

Happy Investing!