Religare Bank Debt Fund
By Lisa Pallavi Barbora
Religare Asset Management Pvt. Co. Ltd’s Religare Bank Debt Fund is an open-ended fund that will invest 80% in banking securities.
Other than the fact that its portfolio will consist mainly of debt and money market securities issued by banks, it is pretty much like any other actively managed bond fund. While a bulk will be invested in bank certificates of deposit (CDs), the rest can be invested in debt issued by public financial institutions (PFIs).
The fund manager has indicated that to begin with the fund duration will be three-four years. At the moment, this is more akin to a long-term fund with duration, which makes sense given the current interest rate scenario. However, the fund is not restricted in terms of maturity of instruments it can invest in and if the environment changes it can have very low duration as well. Bank CDs typically have maturities up to three years and PFI bonds can be of longer maturity of 10-15 years or more.
At least 70% of the assets will be invested in AAA/A1+ equivalent securities. Along with managing duration to generate returns, the fund manager will also take advantage of the unmatched or mis-pricing in credit spread of bank CDs as compared with government treasury bills. The fund can invest at least 10% in mutual fund schemes and will not invest in securitized debt.
It gives focused exposure to the banking sector, which is sensitive to all the aspects of an economy and benefits from any growth in the system. Capital adequacy ratios for banks across the board are better than Reserve Bank of India’s prescribed limit. This shows that the sector is healthy and although the non-performing asset (NPA) levels in government-run banks is higher, there is expectation that the government’s reform drive will help ease that pressure. This sector is relatively better placed in a macroenvironment where the interest-paying ability of many companies is now lower and net profit margins are declining.
Moreover, availability and liquidity of bank CDs is high and so is credit rating, which means their portfolio quality is likely to be good.
For investors, high concentration in banking means high risk. For example, if negative factors drive up NPAs, there is a chance that bank CDs may fall out of favour and impact the fund’s portfolio. Also, if liquidity of securities dries up then the fund manager will have limited choice. In terms of yield, the fund aims to deliver in line with other bond funds, rather than a significant premium.
Is it for you?
Those who invest in bond funds and are looking for a fund with relatively lower credit risk can add this one to their portfolio. But those just starting out with fixed income mutual funds should try short-term money market funds instead.