Aditya Birla Sun Life Mutual Fund

Monthly Fixed Income Update April 2018

Jun 05, 2018
5 mins | Views 116
  • The government has forecasted for FY18 gross domestic product(GDP) growth at 6.6%, up from 6.5% earlier and compared with 7.1% in the year-ago period.India’s eight core industries grew 6.7% in January 2018 against 4.2% in December and 3.4% in January 2017.
  • There are early signals of growth recovery in Indian economy and we expect growth to move towards 7% levels lead by both base affect and economy gaining momentum incrementally.
  • The government will introduce a new bucket of bonds with duration of one to four years, indicating its willingness to borrow more via short-term securities.Bond yields dropped 25 bps, the same day, with benchmark 10 year Government of India (GOI) quoting ~7.37% yield.
  • Retail Inflation last month came at 4.40% (lower than expectations) owing to fall in food inflation (mainly vegetable prices).

Outlook
  • An uptick in inflation in 2018 to an average of 4.5% to 5% from low levels of 2017 is expected. Higher inflation expectation is based on prospects of higher fiscal deficit, election related spending, and government’s likely aim to boost rural income levels
  • Given this expectation and prospects of a gradual growth recovery, it is expected from the RBI to remain on a prolonged pause.Possibility of rate hike exists if the upside risks materialize for both in inflation and growth, particularly if there is a major fiscal slippage and/or sharp rally in commodity prices.

Source: Bloomberg, ABSL AMC Internal Research

Portfolio Action
  • Aditya Birla Sun Life Short Term Opportunities Fund (An open ended short term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 1-3 years):

    The liquidity scenario panned out as anticipated and the yields at the shorter end have gone up.Given the negative surprises on growth over the past 3 quarters and the increasing concern around growth recovery in the monetary policy committee, we think a prolonged pause on rates is the base case. We assign very low possibility to rate hikes in the near future. At these levels government bonds are also quite cheap. Hence, the fund has built exposure in government bond opportunistically to benefit from current low prices.
  • Aditya Birla Sun Life Corporate Bond Fund (An open ended debt scheme predominantly investing in AA and below rated corporate bonds):

    AAA spreads over G Sec are low and hence, expensive. Hence, we have been gradually reducing our exposure to AAA rated bonds. We continue to build exposure towards high yield papers (below AA rated) which can offer good risk reward proposition. Such papers offer opportunities to build customized structure. We intend to keep adding credit structures with adequate covenants to mitigate risk.
  • Aditya Birla Sun Life Medium Term Plan (An open ended medium term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 3-4 years):

    We have been managing this fund with the dual objective of building a good quality accrual portfolio along with managing the duration actively.In the last few months, several interesting opportunities have presented themselves in the credit markets and we have benefited by adding some credit structures in our funds.Regulators are also taking active interest in developing various facets of corporate bond markets like liquidity, new class of issuances etc. which will result in healthy activity in the credit market.
 
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
 
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