The HDFC Asset Management Company (AMC) has launched a new debt mutual fund, called HDFC Long Duration Debt Fund, with a minimum subscription amount of Rs 100.
The new fund offer (NFO ) runs from January 6-17, 2023. It will invest in government securities (G-Sec) with a 30-year maturity period.
Shobhit Mehrotra, head of fixed income at HDFC AMC, said the fund’s ‘Macaulay Duration’ will be greater than seven years and the modified duration will be 12 to 13 years.
Mehrotra added the scheme will invest in instruments maturing in 2050-2055 and will use a roll down strategy to help maintain the ‘Macaulay Duration’ of seven plus years.
Macaulay Duration is the time frame within which the bond yields (interests) is enough to cover the bond’s principal. It is different from Modified Duration because the latter takes into account the present market yield of the instrument.
It is because when one buys a bond it generates periodic interests which are re-invested in other bonds, but the interest rate of the re-invested bonds may or may not be the same as the original bond, as per prevailing market conditions.
That’s why Modified Duration is a more accurate measure since it takes the actual prevailing yield at which the interest from the original bond is being re-invested. So, Macaulay duration divided by the prevailing actual yield is Modified Duration.
Mehrotra said that since it is a long-duration fund, it may fluctuate in a higher degree when compared with shorter-duration funds. Also, there is the risk of reinvestment. It is because the interest generated by the bonds might not get reinvested into bonds of similar or higher interest rate. It will be invested at the then prevailing market yields.
Global Investment Trend
Mehrotra said the interest rates generally fall as countries move up the economic ladder.
The current trend shows that when countries’ economies start maturing, the debt yield interest goes down. For example, the interest rate in Malaysia was 6.3 per cent in the 1990s, but when its gross domestic product (GDP) went up the interest rates came down. Presently, the Malaysian government securities yield are 4.1 per cent. Also, the interest rate of Indian government securities in the 1990s was 12.2 per cent but in 2022 it was 7.3 per cent. “Despite recent increases, the overall yields have shown a downtrend for growing economies,” said Mehrotra.
Image Courtesy: HDFC AMC
Mehrotra said investors should invest in short to medium debt mutual funds if they require funds within three years from now, to, but if they have long-term investment capacity, they may go for long-duration debt fund. The returns will be much superior in the long run. “Lock a part of your investment corpus at a higher rate for a long duration. People cannot lock their money in bank FDs for such long durations as this fund. Also there is a tax benefit of indexation which bank FDs do not have. The current yield to maturity (YTM) is close to high,” Mehrotra added.
