HDFC Long Duration Debt Fund is an open-ended debt scheme investing in instruments such that the Macaulay Duration of the portfolio is greater than seven years. In other words, it is a fund that invests in fairly long-term bonds.
Therefore only investors who can stay invested long-term should consider the fund. One reader asked if this fund can be considered because we are almost at the end of the rate hike cycle.
No. Please do not buy HDFC Long Duration Debt Fund or any fund for that matter only because someone said, “now is a good time to buy”. This would be an extremely volatile holding, and any gains amassed if the rate is not hiked or lowered would soon be quickly lost over time or at the next rate increase cycle.
Only investors with adequate experience with long term debt funds can consider this fund as part of a goal-based asset allocation with systematic rebalancing.
According to the scheme presentation, The scheme “plans to invest in 30+ years residual maturity (2050-2055 maturing) Government Securities with Roll Down Strategy”.
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This means they would buy and hold such long term bonds. Assuming such bonds have the dominant exposure in the portfolio, the credit risk would be reasonably low. However, the interest rate risk, also known as duration risk also known as demand vs supply risk in the market, would be extremely high for at least the next 25 years! If the fund manager manages to buy and hold such bonds, such risk will decrease with time but quite slowly.
The fund house recommends the product as a “core constituent of Debt Asset Allocation for meeting long term goals!!!” and says that the preferred Investment
horizon” is 10+ years.
If the fund plans to hold a big chunk of bonds maturing after 30+ years, the volatility in the NAV would be extremely high, and the investment duration, even for an experienced investor, should be well above ten years. The fund can go through months and months of poor returns or even negative returns. So it is not for everyone.
The fund house also claims in its presentation that HDFC Long Duration Debt Fund can be used as a source of passive income. That is for systematic withdrawals, say after retirement.
Any systematic withdrawal from a volatile product (debt or balanced advantage funds) is extremely dangerous as the corpus would deplete faster if the NAV falls since more units need to be sold. Therefore we do not recommend this either.
In summary, HDFC Long Duration Debt Fund should only be considered by experienced debt fund investors. However, a normal gilt fund that doubles as a dynamic bond fund is a better buy than his as there is a reasonable chance the volatility is lower due to duration play by the fund manager and because they hold bonds of shorter duration.
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