In this edition of the debt fund profile, we look at ICICI Prudential Savings Fund. This is an open-ended Low Duration debt scheme investing in instruments such that the Macaulay duration of the Portfolio is between 6 months and 12 Months.
The fund’s category, “Low Duration”, gives one the impression that it is suitable for short-term needs. Unfortunately, this is not true. If we look at the risk-class matrix, the credit risk is moderate, and the interest rate risk is relatively high. To understand the Macaulay duration, see the Fund profile: SBI Magnum Ultra Short Duration Fund.
It seems silly for a fund with a relatively high-interest rate risk to be classified as a “low duration” fund, but there you are!
The historical yield to maturity, average portfolio maturity and modified duration (a measure of interest rate sensitivity) are shown below.
The yields have increased recently due to the rate hike. The average maturity has increased over the last two years, but the modified duration has remained unchanged. The fund has an average maturity of 5.59 years and a modified duration of only 0.78Y.
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SEBI RIA Avinash Luthria explained that this could be because of the dominant presence of floating-rate bonds and some interest-rate swaps in the portfolio. For example, GOI FRB 22-Sep-2033. Although this is a long term bond, since it is a floating rate bond, its price will not fluctuate as much because of interest rate changes because of its variable coupon rate. See, for example: How Floating Rate Debt Mutual Funds Reduce Interest Rate Risk. The interest rate swaps also render a portion of bonds as effectively floating-rate. Also see Interest Rate Swaps: A way for MFs to reduce interest rate risk. These have allowed the fund to buy long-term bonds while keeping the modified duration low.
The five-year rolling returns of ICICI Pru Savings Fund, ICICI Pru Short Term Fund, ICICI Pru Money Market Fund and ICICI Pru Gilt Fund are plotted below. The Savings fund has a fairly stable return profile for five years.
The maturity profile of the fund is shown below. The increase in exposure to above-5-year bonds is seen below. These bonds constitute about half the portfolio.
Finally, the credit rating history is shown below. Most of the high-duration debt is from gilts. The credit risk is non-zero but reasonably low.
The fund can be considered by those who wish to invest for five years or more and perhaps even a less volatile replacement for gilt funds. However, the portfolio has enough interest rate risk to cause the NAV to wobble and the possibility of credit events. So one cannot buy and forget but must keep track of the portfolio via fund factsheets.
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