A happy confluence of regulatory changes on SEBI fund classification and then on taxation of capital gains has made the relatively new Income + Arbitrage FoF category an exciting proposition to develop as the industry’s flagship retail debt offering .
For a 2 year holding period, these funds offer very competitive post tax return prospects, coupled with an all-weather aspect as the FoF structure enables fund managers to calibrate duration and credit quality to suit market conditions.
The fact that they don’t have to include even a small portion of unhedged equity to boost returns like what conservative hybrids do, is seen as a big draw for a number of conservative investors who can now evaluate this vs traditional fixed income instruments.
HSBC MF’s Income plus Arbitrage FoF dynamically moves from defensive to core/balanced to aggressive by blending different proportions of debt funds from their armoury ranging from ultra short all the way to gilt funds.
The fund makes no compromises at any time on credit quality – its only AAA/G-Secs all the way across all the underlying funds it invests in. Modified duration moves effectively within a range of 0.5 to 4, giving it sufficient leeway to aim for capital gains in a declining interest rate environment.
The current duration is close to the max of 4 – signifying the fund house’s bullish stance on bonds right now.
Shriram cautions that with the 10 yr yields now at 6.36% on the back of a big rally in recent weeks, we are not too far away from the terminal rate of 6-6.25% that consensus views have baked in on the basis that the repo rate will come down to 5.5% at the end of this rate cut cycle.
It is time to remain nimble and agile while participating in this bonds bull market – and a dynamic fund like their Income plus Arbitrage FoF can be an ideal vehicle for investors to earn healthy returns while knowing that the fund can and will change course at the appropriate time.