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1 1
Debt MarketsOffering Debt Fund to Customers
2 2
Risks in Debt Market
Interest Rate Risk
Credit Risk
Valuation Risk (Erstwhile)
SEBIs circular Feb 2010 has mitigated the same
3 3
Interest Rate Risk
In Debt Funds Income comes from
* Accrual of Interest
* Capital appreciation or depreciation due to interest rate fluctutation
Higher the Portfolio maturity – Higher is the risk and vice versa
We never saw -ve returns or fall in NAVs in liquid funds earlier, but that too is possible although for very short periods in extreme circumstances
4 4
Prior to SEBI Feb 2010 Circular
Money market securities were valued on the basis of amortization upto six months
Flexibility was given to fund houses in terms of spread management across G-secs and other rated securities
Risk of non realisation of NAV in the above strategy was realised when mass redemptions were received in 2008 after Lehman crisis
Hence Feb 2010 circular was released which laid down valuation norms of debt securities
5 5
Essential Parameters for selection of debt funds
- Investment Duration of customer
- Understanding of customer of the product where his money will be invested and risks thereof
- Interest Rate Scenario
6 6
Remember the Thumb Rule
The Duration of the Fund should be Equivalent to the
investment duration of the client
7 7
Suitablity of Product for Investor
Horizon below 1 month
Funds investing into Call money markets
Upto 3 years
Into static debt funds where their duration remains constant most of the times and try match investors duration and fund duration.
* Static Debt funds are the ones which keeps the duration of fund in a specific range.
8 8
Example
Returns after 3 months in a fund having 3 months avg duration will be equvivalent to current yield 9% i.e. 2.25%
But had he invested in a scheme having 3 year maturity duration the returns could be -0.5%
However educating the customer is very important because even for a 3 month investor and on rise of 1% i interest rates, the NAV can go down on a particular day by 0.25%(absolute) and may take some time to recover.
(Instant returns can be -ve)
When interest rates rise by 1 % and YTM is of 9%
9 9
Income Funds / Dynamic Funds
To be offered only if the investment horizon is beyond 3 years or the customer has a view that the interest rates will fall
To be offered only to sopshticated investors who undrestands risk and are ready to take a short term beating in returns
Only favorable in a falling interest rate regime otherwise short term funds are better
10 10
Current Interest Rate Scenario
10 year G Sec HistoryMean since 1997 – 8.1%
Median since 1997 – 7.88 %
Movement Range - 13.65% - 5.02%
10 yr Gsec over 9% based on history looks favorable
however the current scenario is quiet volatile and
one should play safe
11 11
NJ Initatives on Debt
Shall come out with a recommended category for different tenures of investment
Shall come out with recommended schemes across each debt category viz. Liquid / Shor Term / Income
A matrix of scenario analysis will be shared on a quarterly basis with the partners
12 12
Product Matrix
* Portfolio Durations mentioned are the range of duration funds typically have in their portfolios. In certain time periods, funds can operate other durations also as deemed fit by the fund manager.
Investment Horizon
Product CategoryPortfolio Duration
Example
0-3 Month Liquid Funds / Call Money FundsLess than 3
monthsHDFC CMF Saving
3 month – 1 Year Money Manager Funds 3M - 12MDSP BlackRock Money Manager Fund
1 Year + Short Term Funds / FMPs 1Y - 2Y HDFC STP
2 Years + Accrual/Income Opportunities Funds / FMPs 1Y - 2.5YBirla Sun Life Short Term Opportunities Fund Plan
3 Years + Income Funds / Dynamic Bond Funds / FMPs 3Y - 6Y HDFC Income Fund
13 13
Recommendations
Money Manager Funds
Short Term Funds
No Scheme NameAAUM in
Crs (June -13)
Expense Ratio (%)
Cash YTM (%)Avg.
Maturity (Yrs)
Mod. Duration
(Yrs)Exit Load
1 DSP BlackRock Short Term Fund 860.14 1.00 26.96 NA 0.79 0.68 Upto 6 months 0.50%2 Kotak Bond Short Term Plan 2,214.12 1.13 3.10 10.45% 2.53 1.88 Upto 90 Days 0.50%3 Reliance Short Term Fund 3,376.19 1.04 13.06 10.46% 2.11 1.75 Upto 6 months 0.50%4 Tata Short Term Bond Fund 270.97 1.22 8.00 10.50% 1.34 1.17 Upto 180 Days 0.50%
Name AAUM in
Crs (June -13)
Expense Ratio (%)
Exit Load
Birla Sun Life Cash Manager - Gr 3,113.29 0.78 NILDSP BlackRock Money Manager Fund - Gr
2,110.66 0.92 NILHDFC CMF - Treasury Advantage Plan - Gr
8,604.18 1.14 NILKotak Flexi Debt Scheme Plan A - Growth
1,711.86 0.74 NIL
14 14
RecommendationsAccrual Funds
Income Funds
Scheme NameAAUM in
Crs (June -13)
Expense Ratio (%)
Cash YTM (%)Avg.
Maturity (Yrs)
Mod. Duration
(Yrs)Exit Load
1 Birla Sun Life Income Plus 5,143.96 1.77 19.43 9.04% - 5.49 Upto 365 Days 1%2 BNP Paribas Bond Fund 279.35 1.93 8.32 10.77% 1.81 1.30 Upto 1 year 1%3 DSP Blackrock Bond Fund 231.50 2.21 48.76 NA 3.46 2.18 Upto 12 months 1.00%4 Kotak Bond Fund 6,971.17 1.80 4.32 9.40% 9.58 5.38 Upto 180 days 1%5 L&T Triple Ace Bond Fund 846.09 2.00 19.78 NA 4.54 2.74 Upto 9 months 1.50%6 SBI Magnum Income Fund 5,266.21 1.74 26.50 9.30% 4.85 3.18 Upto 1 year 1%7 Tata Income Fund 1,272.45 1.11 13.93 9.73% 4.50 3.26 Upto 90 Days 1%
No Scheme NameAAUM in
Crs (June -13)
Expense Ratio (%)
Cash YTM (%)Avg.
Maturity (Yrs)
Mod. Duration
(Yrs)Exit Load
1 Birla Sun Life Medium Term Plan 825.96 1.50 3.2912.50%
- 1.50Upto 365 Days 2%, Between 365 to 730 Days 1%
2 Birla Sun Life Short Term Opportunities Fund
876.67 1.00 4.57 11.29% - 1.09 Upto 365 days 1%3 DSP BlackRock Income
Opportunities Fund497.70 1.79 17.71 NA 1.21 0.92 Upto 9 months 1.00%
4 Kotak Income Opportunities Fund 449.19 2.49 0.00 11.00% 2.67 1.95 Upto 1 year 2%
5 L&T Income Opportunities Fund 143.40 0.77 13.61NA
2.25 1.80Upto 1 Year 2% ,Between 1 to 2 Years 1%
6 Reliance Regular Savings Fund Debt Plan
2,548.32 1.79 4.03 10.89% 1.92 1.65 Upto 1 year 1%
15 15
Scenario Analysis – Income Funds
Returns are annualised for period of more than a year; Returns for rest of the periods are on an absolute basis. Scenarios are based on following assumptions:YTM (9.80%), Modified Duration (4.80 years) and Expense Ratio (1.80%) Assumptions are subject to change from time to time.
Interest Rate Movement from current (bps)
Interest Rate Movement 3 Month 6 Month 1 Year 2 year 3 Year 5 Year
100 -2.68 -0.55 3.70 6.26 7.12 7.80
50 -0.34 1.73 5.85 7.14 7.56 7.90
0 2.00 4.00 8.00 8.00 8.00 8.00
-50 4.34 6.28 10.15 8.86 8.43 8.10
-100 6.68 8.55 12.30 9.71 8.87 8.21
-150 9.01 10.83 14.45 10.56 9.30 8.32
-200 11.35 13.10 16.60 11.40 9.73 8.43
Expected Returns
16 16
Scenario Analysis – Short Term Funds
Returns are annualised for period of more than a year; Returns for rest of the periods are on an absolute basis.Scenarios are based on following assumptions:YTM (11%), Modified Duration (1.50 years) and Expense Ratio (1.00%) Assumptions are subject to change from time to time.
Interest Rate Movement from current (bps)
Interest Rate Movement 3 Month 6 Month 1 Year 2 year 3 Year
100 1.13 3.75 9.00 9.82 10.09
50 1.81 4.38 9.50 9.91 10.04
0 2.50 5.00 10.00 10.00 10.00
-50 3.19 5.63 10.50 10.09 9.96
-100 3.88 6.25 11.00 10.18 9.92
-150 4.56 6.88 11.50 10.27 9.87
-200 5.25 7.50 12.00 10.37 9.84
Expected Returns
17 17
Scenario Analysis – Money Manager Funds
Returns are annualised for period of more than a year; Returns for rest of the periods are on an absolute basis.Scenarios are based on following assumptions:YTM (10.75%), Modified Duration (0.40 years) and Expense Ratio (0.80%) Assumptions are subject to change from time to time.
Interest Rate Movement from current (bps)
Interest Rate Movement 3 Month 6 Month 1 Year
100 2.21 4.83 10.05
50 2.35 4.90 10.00
0 2.49 4.98 9.95
-50 2.63 5.05 9.90
-100 2.76 5.13 9.85
-150 2.90 5.20 9.80
-200 3.04 5.28 9.75
Expected Returns
18 18
Thanks & More Details
Nitin SawantFinancial Planner
9422518694 /9145354545