On the flip side, however, the strategy is deployed without transparent communication. You may be in a roll-down debt fund and not even know it.
How it works
Creating a portfolio and holding it to maturity is not a new idea in asset management. Fixed maturity plans (FMPs) have been deploying it for well over a decade. However, the roll-down strategy applies this concept to open-ended funds.
This gives investors the benefit of predictable returns alongside the freedom to enter and exit on any business day. For example, assume that a fund launches a four-year roll-down strategy with a portfolio yield of 5% and expense ratio of 0.5%. Assuming there are no credit defaults, you can reasonably estimate a compounded annual growth rate (CAGR) of 4.5% (5% – 0.5%) for the next four years.
“If you buy a bouquet of securities, and hold them till maturity, you are likely to get the yields implied in them as returns. A scheme deploying such strategies of roll-down by simply aggregating such similar maturity papers would provide better visibility of returns along with liquidity,” said Amit Tripathi, chief investment officer, fixed income investments, Nippon India Mutual Fund.
So how does the fund manage to do this? Essentially, it ensures that any fresh securities it buys due to inflows and outflows have a maturity that matches the residual tenor of the strategy. This keeps the overall maturity of the fund on the same glide path, as the original portfolio.
The strategy is not without its pitfalls, however.
First, you or your adviser may well be asleep at the wheel when the maturity date arrives. If you do not redeem your money from the fund in the target period, you might get locked into a fresh roll-down strategy. This is different from an FMP which automatically terminates and pays out when its term gets over. Also since the maturity date or period is subtly, rather than overtly, communicated, even savvy investors might miss the cues.
Second, remember that bonds pay interest to debt funds and the fund manager has to figure out how to invest that interest amount. “The interest received on bonds has to be reinvested, but when this interest is received, yields in the market may have changed. Hence, you may have to reinvest the interest at lower yield. This is called interest leakage and is most pronounced in long roll-down strategies (such as 10 years or longer),” said Anurag Mittal, senior fund manager—debt, IDFC Asset Management Co.
IDFC deployed the roll-down strategy in two of its key funds—IDFC Banking and PSU Debt and IDFC Corporate Bond. For IDFC Banking and PSU Debt, the strategy was deployed in the second half of 2018. In case of IDFC Corporate Bond, the strategy was initially deployed in 2016 and matured in early 2020. The AMC has launched a fresh roll-down strategy in it.
Third, the fund may have to buy fresh papers of lower maturity if there are big inflows. “There is ‘odd lot’ impact. For example, a 10-year fund might find a good supply of 10-year papers at launch. But next year it has to find nine-year papers and this may not be easily available and so on,” said Mittal.
Fourth, the fund can give up on the roll-down strategy and revert to active management of the portfolio without your consent. Although this is unlikely, given the reputational loss that such a fund might face, there is nothing in the official documentation stopping a switch.
Fifth, the strategy gives up on active management of maturity for predictability of yield. This is also a drawback but may not be so in all cases. “If your financial goal matches the target period of the roll-down fund or the residual maturity of a roll-down fund, this will work better for you than a non-roll-down fund,” said Feroze Azeez, deputy CEO, Anand Rathi Pvt. Wealth Management.
Finally, redemptions can present a problem if the fund invests in lower-rated illiquid papers. Mittal said redemptions aren’t a big problem in funds investing largely in AAA-rated securities as they are marked closer to their realizable value.
AMCs in many of these schemes do not write “roll-down” or explain this strategy anywhere in their scheme information documents (SIDs). The details are communicated over fund manager concalls and newsletters to distributors.
“Some AMCs only convey the roll-down strategy to mutual fund distributors in fund manager concalls. This leaves investors in the lurch,” said Viral Bhatt, founder Money Mantra.
The strategy also sometimes goes against the official labels that AMCs put on the schemes. Amol Joshi, founder, Plan Rupee Investment Services, identified six debt schemes following the roll-down strategy, including Nippon Nivesh Lakshya, L&T Triple Ace, Axis Dynamic Bond, IDFC Corporate Bond, IDFC Banking and PSU debt and Nippon Floating Rate Fund. However, many of the schemes do not explicitly talk about this strategy in their communication. Persons with knowledge of the schemes from Axis, IDFC and Nippon confirmed the information to Mint on the condition of anonymity. Messages sent to L&T remained unanswered.
Apart from these, a spokesperson for DSP Mutual Fund confirmed that the fund house had implemented the roll down strategy in March 2018 in DSP Savings Fund (a money market fund) and in September 2018 in DSP Corporate Bond Fund.
If you have a defined time horizon and want a reasonably predictable return along with liquidity, roll-down may well work for you. But ensure that the fund has an extremely high-quality portfolio of AAA issuers or government bonds.
With schemes like IDFC Banking and PSU Debt and IDFC Corporate Bond, high quality bonds are built into SIDs. Other AMCs may emphasize it in communications. “We’ve implemented roll-down in Axis Dynamic Bond since November 2019 with a 10-year time horizon. We invest predominantly in AAA bonds to maintain liquidity,” said R. Sivakumar, head, fixed income, Axis Mutual Fund. Nippon Dynamic Bond, another scheme deploying this strategy, invests almost entirely in state bonds.
What you should do
Even if you are not seeking out this strategy, your existing scheme might adopt it. “A lot of schemes have embraced the structure in 2020 and they have seen their assets shoot up. For example, Nippon India Floating Rate Fund doubled in size from January to July, growing by around ₹6,000 crore after going roll-down,” said Joshi.
Some schemes are part of the way into their roll-downs and you must ensure that the remaining time for the roll-down matches your time frame. “On the shorter end, we implemented roll-down in Axis Banking and PSU Debt two years ago and that strategy has another two years to go. There has been an uptick in investor interest in such schemes over the past year or so,” said Sivakumar.
But since the strategy is not always disclosed in SIDs, keep an eye on emails from your mutual fund. If you have a distributor, make sure, he is up to speed on this.