MUMBAI: Parag Parikh Conservative Hybrid Fund will focus on state development loans (debt issued by state governments) of six-seven year maturity, Rajeev Thakkar, chief investment officer (CIO) of the fund said on Monday.
Thakkar, in a note, said this will allow the fund to have a yield to maturity of 6.72% and a modified duration of 4.89 years. Yield to maturity gives a rough idea of returns (before expenses) if the fund is held until its portfolio matures, assuming a relatively static portfolio and no defaults in the holdings. Modified duration is the sensitivity of a debt fund to interest rate movements.
Apart from its debt holdings, the scheme is required to invest 10-25% of its assets in equity. It can also invest in units of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs) up to 10% of its assets.
“A minimum investment horizon of 3 years+ is recommended for this scheme. As can be seen from the portfolio, currently the investments are largely in the 6 to 7-year maturity bucket. Parag Parikh Conservative Hybrid Fund does not aim to be moving between extreme ends of the maturity spectrum, say invest in short-term treasury bills at some time and at other times invest in 30-year bonds. However, flexibility in selecting the maturity bucket helps us invest where we see the yields attractive,” he said.
“Currently the SDLs in the 6-7 year maturity bucket capture most of the steepness of the yield curve. Hence, for example, these are trading at Yield To Maturity of around 6.6% as compared to short term treasury bills of 3.3%. Lengthening of the maturity beyond this point does not add much by way of yield but increases the interest rate risk,” Thakkar added.
Thakkar also cautioned against focusing on interest rate risk excessively. “In simple terms, interest rate risk matters if your investment horizon does not match the maturity profile of the investments, especially if you need money in a short time while the bonds are of longer maturity. However, as long as the investor broadly has time horizons which are not too different from the fund investments, things should work out fine over the tenure of the investment on the interest rate risk front,” he said.
He further highlighted that short-term interest rates are more likely to move up than longer-term rates. “Our view is that sure, short-term interest rates can move up. It is not necessary for the medium- and long-term rates to move up in tandem. Hence, it is not inconceivable that the overnight rates and short term treasury bill rates move up from around 3.25% levels to say 4% levels and 5 year Government Securities rates are around 6%. In fact, the yield curve seems to imply that a lot of rate hikes are already priced in,” he said.
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