The Covid-19 pandemic has wreaked havoc across financial markets.

By Jiju Vidyadharan

The Covid-19 pandemic has wreaked havoc across financial markets. Even the hitherto steady fixed income market is shaken. Investors are concerned about credit quality and liquidity of the underlying instruments. In such unbridled times, we review the banking and PSU (public sector undertaking) category, which invest 80% of their assets in debt instruments of banks, PSUs, public financial institutions (PFIs) and municipal bodies.

Better credit & liquidity profile
These funds primarily invest in top-rated instruments of the debt market—bonds and debentures issued by banks, PSUs and PFIs—thus providing a better credit profile for investment compared to most other mutual fund categories.

Credit quality comparison among debt funds ranked in the CRISIL Mutual Fund Ranking of March 2020 shows that banking and PSU funds have predominately invested in top-rated papers versus most other categories with portfolio average maturity above one year. Average exposure of these funds to AAA rated papers stood at 92% in April 2020. Exposure to similar AAA papers stood at 53% for medium duration funds, 72% for dynamic bond funds, 84% for short duration funds and 91% for medium to long duration funds, while long duration and corporate bond funds had higher exposure at 97% and 98%, respectively.

In addition to having higher investments in top-rated papers, the category had the least amount of investments in securities that had ‘negative’ or ‘watch negative’ outlook by rating agencies. It had just 1.4% of exposure to such securities as of the latest portfolio disclosure (April 2020). The next best were medium to long duration funds with 1.5% exposure to such securities, while credit risk funds had the highest exposure of over 27.4%.

Further, analysis of debt mutual fund portfolio liquidity of corporate bonds based on CRISIL’s internal model that factors trades and spreads of issuers show that the category also has relatively high liquidity in the underlying portfolio, enabling the fund manager to rebalance the portfolio more efficiently. Analysis of their portfolio for month of April 2020 reveals that banking and PSU funds enjoyed the average exposure at 94.6% to liquid assets (includes liquid corporate bond issuers, sovereign papers and cash & equivalents) only marginally lower than long duration funds (95.3% exposure).

Among other similar debt categories, medium to long duration funds had 82.4% exposure, corporate bond funds had 81.9%, dynamic bond funds had 72.7%, short duration funds stood at 71.4%, medium duration funds had 51.2% and credit risk funds had 25.3% of their portfolio in similar liquid assets.
Performance analysis

The category has also shown encouraging performance, beating all other categories analysed viz., corporate bond, credit risk, dynamic bond, medium duration, medium to long duration and short duration funds in 1, 3, 5 and 7- year periods ended May 22, 2020 with returns of 11.83%, 8.32%, 8.40% and 8.53% respectively. In the latest six-month period till May 22, the category average returns were 5.30%, marginally lower than medium to long duration funds which benefitted from the interest rate easing and gave 5.67% returns during the period.

Fitment
Investors with a low risk appetite looking for a relatively safe investment avenue can consider banking and PSU debt funds. However, these are mark-to-market products and exposed to market risk. Go for analysis of personal risk-return profile, portfolio attributes of the scheme, the fund house’s track record before investing.

The writer is senior director, CRISIL Funds & Fixed Income Research