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Unlike some of the central banks globally that have taken to rate hikes on the back of rising inflation, the Reserve Bank of India has so far not done so. It is widely expected to refrain from  raising the repo rate on 8 April, though with the risk of inflation looming, a rate hike is likely sooner rather than later. 

In this backdrop of interest uncertainty, investors with a moderate risk appetite and an investment horizon of 2-3 years, can consider investing in one of the top-performing corporate bonds funds. HDFC Corporate Bond Fund is a good choice here. 

While these funds are exposed to interest rate risk, unlike many shorter maturity debt funds, these funds can selectively invest in relatively higher maturity debt papers to benefit from the currently steep yield curve. Corporate bond funds are debt funds that must invest at least 80% of their assets in only the highest-rated corporate bonds (typically AA+ and above). This ensures a certain minimum level of credit quality, thereby lending some comfort to investors. 

Better returns 

HDFC Corporate Bond Fund has generated an average one-year return of 8.2%, three-year return of 8.5%, and five-year return of 8.2% during the period from January 2016 till date. Compared to this, the corporate bond fund category has generated respective returns of 7.5%, 7.7%, and 7.4% over this period (all returns are CAGR, for regular growth plans). The analysis is based on rolling returns for funds with at least five years’ history. 

HDFC Corporate Bond Fund has been managed by Anupam Joshi since October 2015. It follows a mix of accrual and duration strategies. That is, it derives returns from the accruing interest on the bonds in its portfolio and by modifying its duration—raising it when interest rates are expected to fall and vice versa—to benefit from the changing rate cycle. This provides a potential for higher returns but also exposes the fund to interest rate sensitivity. 

Portfolio details 

As of end-February, HDFC Corporate Bond Fund held around 97% of its portfolio in AAA, A+ and sovereign debt papers. The rest was in cash and cash equivalents. In the past too, the fund has largely held 90% or more of its portfolio in such papers. As of end-February, the fund had an overall maturity of 4.3 years. Ace MF data shows that the fund has 40% of its portfolio in debt papers with a maturity of over five years, higher than that for many peer funds. This is most likely to benefit from the higher yields from the longer maturity bonds given the steep yield curve.

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