AMC Speak Great time for lumpsum investments in this category Raghav Iyengar, EVP & Head - Retail & Institutional Sales, ICICI Prudential AMC

Raghav Iyengar believes this is a great time for lumpsum investments in low duration accrual oriented corporate bond funds, like the ICICI Prudential Regular Savings Fund. A relatively less noticed aspect from the Budget is specific measures to boost the corporate bond market, which Raghav believes will not only deepen it, but will also help soften yields from the current elevated levels – thus offering a great combination of high YTM and potential capital appreciation down the line.

WF: What is your take on RBI’s recent policy statement and how does this impact your view on fixed income markets going forward?

Raghav: In the recent Policy, Reserve Bank of Indian (RBI) was a bit dovish in its H2FY19 projection with inflation expected to be around ~4.5%. However, we expect inflation in first half of the fiscal to average around 5.5% with mild upside risk. Consequently, worries relating to rate hike have subsided for now which makes the shorter end of the yield curve reasonably attractive. The last quarter seasonality, owing to the tight liquidity conditions, further strengthens the case for short duration schemes.

For medium term, we continue to maintain a neutral stance on yields and would continue to evaluate the movement in crude oil prices, impact of MSP increase on inflation and global bond yields movement. We recommend investors accrual schemes such as ICICI Prudential Regular Savings Fund as these schemes offer healthy yield-to-maturity at current levels.

Given that bond yields could be volatile owing to concerns arising out of higher inflation, we recommend investors to stick to short duration schemes. But for those investors who look to benefit from such volatility can invest in ICICI Prudential Long Term Plan.

WF: What are some of the recent policy initiatives around deepening the corporate bond market and how will this influence accrual strategy oriented debt funds?

Raghav: There are three recent developments which has been favourable for accrual strategy oriented debt Schemes.

1) In a bid to support growth, the Government in Union Budget 2018, has set itself on an expansionary path which caused the fiscal deficit to slip to 3.5% in FY18, as opposed to the previous target of 3.2%. And, the fiscal deficit estimates for FY19 have also been revised to 3.3%.
2) Most regulators permit bonds with the ‘AA’ rating only as eligible for investment. In Budget 2018, it has been proposed to move from 'AA' to 'A' grade ratings for investment purposes.
3) RBI has issued guidelines to nudge Corporates access bond market. The Regulator can consider mandating, beginning with large Corporates, to meet about one-fourth of their financing needs from the bond market.

The above changes are likely to help broaden the credit market and can provide much needed liquidity and depth.

WF: The recent global sell-off seems to trace its origins to upheavals in the US bond market, where most believe that a 30 year bull market has finally ended. What would implications of volatility in US bond markets be for global bond markets in general and our bond market in particular?

Raghav: It is still too early to take a call as to the 30-year bull market is over or not. But definitely the environment in the Indian bond market is volatile. With this perspective, it makes sense to remain invested in low duration Schemes.

WF: How have you positioned your Regular Savings Fund in terms of duration and credit profile?

Raghav:
In terms of Duration

At present, the portfolio of ICICI Prudential Regular Savings Fund has high Yield to Maturity of 9.81% as on January 31, 2018 in comparison to an average 1-year YTM of 9% from January 31, 2017 to January 31, 2018.

The scheme believes in static duration management. In the last one year from January 31, 2017 to January 31, 2018, the duration has been in the range of 1.5 to 2.5 years. As of January 31, 2018 modified duration for the scheme is 1.67 years.

Considering the market conditions, the carry rate is higher at this point of time and hence, it may be a good time to invest now and capture the yields at prevailing levels of YTM.

In terms of Credit Profile
The scheme portfolio is well-diversified across a large number of securities which reduces risk pertaining to high exposure in a single bond.

The scheme is well diversified and invests predominantly across various credit ratings ranging between AAA to A with an aim to maintain a reasonable portfolio

The portfolio is invested across 77 different securities with average exposure of around 1.23% to each individual issuer, highest exposure to single issuer being limited at 4.03%. This ensures that portfolio is well diversified and has limited concentration risk.

As on January 31, 2018, the portfolio comprises of investment of ~86.04% A & Equivalent and above securities and ~5.14% in CBLO & Current Assets.

Disclaimer: The portfolio of the scheme is subject to changes within the provisions of the Scheme Information document of the scheme. Please refer to the SID for investment pattern, strategy and risk factors.

Recent Portfolio Credit Rating Upgrades
The scheme portfolio is well-diversified across a large number of securities which reduces risk pertaining to high exposure in a single bond.

WF: For investors with a 3 year horizon, what kind of performance history has this fund demonstrated?

Raghav: On a three year basis, the Fund has delivered reasonably steady returns, as can be seen from the tables below. The returns presented here are the post-tax performance.

Tax-Efficient Return

WF: What is the key investment argument for your RSF now?

Raghav: The recent announcements in Budget 2018 (listed above) can help broaden the credit market by way of improved depth and liquidity. This can lead to softening of yields, due to increased supply. Hence, we recommend investors to invest at the current elevated levels in schemes like ICICI Prudential Regular Savings Fund which has Yield-to-Maturity (YTM) of 9.81% (Data as on 31 January, 2018). Considering that yields are at elevated levels, we believe it is a good opportunity to invest lump sum and at the current levels of YTM.

WF: Can one opt for Automatic Withdrawal Plan in this Scheme?

Raghav: Yes, the facility is available for this Scheme. One can use this to generate consistent cash flows.

Riskometer & Disclaimer

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

The information contained herein is only for the reading/understanding of the registered Advisors/Distributors and should not be circulated to investors/prospective investors. All data/information in this material is specific to a time and may or may not be relevant in future post issuance of this material. ICICI Prudential Asset Management Company Limited (the AMC) takes no responsibility of updating any data/information in this material from time to time. The AMC (including its affiliates), ICICI Prudential Mutual Fund (the Fund), ICICI Prudential Trust Limited (the Trust) and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The sector(s)/stock(s) mentioned in this communication do not constitute any recommendation of the same and ICICI Prudential Mutual Fund may or may not have any future position in these sector(s)/stock(s). Past performance may or may not be sustained in the future. Nothing contained in this document shall be construed to be an investment advise or an assurance of the benefits of investing in the any of the Schemes of the Fund. Recipient alone shall be fully responsible for any decision taken on the basis of this document

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