Tag: corporate bonds

How debt mutual funds generate returns

Personal Finance

[ad_1]

Read More/Less


The functioning of debt mutual funds (MF) is easy to understand, once you get the concepts of accrual and mark-to-market.

A debt MF invests in fixed income instruments such as corporate bonds, government securities; money market instruments such as certificates of deposits issued by banks and commercial papers issued by various companies.

There is a defined coupon or interest that all these instruments earn. Hence, this coupon accrues in the portfolio of a debt fund and is taken into account for the computation of the daily net asset value (NAV). This accrual is done proportionately for every day. It is the annual rate divided by 365.

From the limited perspective of interest accrual only, an investor’s return from the units of a debt fund is the accrual from the point of entry to the point of exit.

Mark-to-market

The other aspect is mark-to-market (MTM). Since MFs are a public investment vehicle, investors can come in and exit any day. For an equitable entry and exit pricing, it has to be based on market levels, that is, the daily published NAV.

It is called mark-to-market because it represents, the price or value the portfolio would have fetched, if the entire portfolio were to be hypothetically sold off.

Since prices are subject to change every day, it adds to or takes away from the accrual of that day. If the market is favourable and bond prices move up over the previous day, that much is added to the accrual for the day. If prices move down, that is subtracted from the accrual of the day and we get the net return.

Let us take a simplistic example. There is a debt MF scheme with a corpus size of ₹100. The portfolio yield to maturity (YTM) is say 5.5 per cent. The YTM is given in the fund factsheet, which can be found on the AMC website. This YTM is taken as the proxy for the accrual level.

However, there is a refinement here. There are expenses charged to the scheme, and the net accrual level is YTM minus expenses. The NAV that is published is net of expenses.

Let us say, in our example, the expense charged to the fund is 0.5 per cent. Hence the net accrual is 5 per cent. Every day, the accrual level of the portfolio is 5 per cent divided by 365 per ₹100, which is ₹0.0137 per day.

If the MTM impact of that day is positive, depending on how bond prices have moved in the secondary market, you get the accrual plus MTM as return for that day, which is captured in the NAV.

Bond basics

If bond prices dropby more than the accrual, your return is negative for that day. In our example, the accrual per day seems miniscule. However, it is a function of time. Over one day, it accrues only ₹0.0137 per ₹100.

Over three months, it accrues ₹1.25 per ₹100 and puts the fund in a better position to absorb any adverse MTM shock. Over one year, it is ₹5 per ₹100.

To understand the MTM impact, there is a metric called modified duration (MD), which, too, is given in the fund factsheet.

The MD is taken as the multiplier on the interest rate movement in the market to gauge the impact on price movement, and hence the fund NAV.

Bond interest rates and prices move inversely. Let us assume for understanding, interest rates moved by 0.5 per cent in both directions, up and down over one year. If interest rates moved down by 0.5 per cent, with an MD of 2 years, the NAV of the fund is positively impacted by 0.5 X 2 = ₹1 per ₹100. If interest rates move up, there is a negative impact of ₹1 per ₹100. While, this is a simplistic example, it gives a perspective on how debt funds make returns.

The writer is a corporate trainer (debt markets) and author

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , , , , ,

What’s behind the demand for Indian high-yield dollar bonds?, BFSI News, ET BFSI

Personal Finance

[ad_1]

Read More/Less


There are no takers in India for corporate notes with even a whiff of credit risk. But such is the fear among global investors around China’s overleveraged property developers that money can’t stop pouring into Indian high-yield dollar bonds.

Domestic debt issuances by all except the top-rated borrowers have shrunk since the collapse of the IL&FS Group, a major infrastructure financier, in September 2018. Firms rated below AA have managed to garner just 382 billion rupees ($5.2 billion) this year, a far cry from their 2017 haul of 2.1 trillion rupees.

The situation in the international market is the exact opposite. Junk-rated nonfinancial firms from India have scooped up a record $9 billion this year, almost three times the year-earlier period. JSW Steel Ltd. alone raised $1 billon last month. Tycoon Gautam Adani has pipped even historically trusted public-sector issuers, such as Power Finance Corp. and Export-Import Bank of India. Firms linked to Asia’s second-richest man have raised $9 billion in the past five years, more than any other Indian borrower.

For investors wary of China, looking at India makes sense. At more than $300 billion, China Evergrande Group’s liabilities alone are more than twice the size of India’s entire corporate bond market. While nobody knows which sector or private business in the People’s Republic will get punished next by Xi Jinping’s “common prosperity” campaign, overseas investors have a fair idea which Indian corporate groups have a good relationship with Prime Minister Narendra Modi’s government.

Still, policy makers in New Delhi and Mumbai would prefer fund-raising to take place locally, in their home currency. After all, they’re running a fully stocked liquidity bar, with the surplus in the banking system ranging between $90 billion and $130 billion since end-June. It’s a risky ploy. With the Federal Reserve close to reining in generous monetary support for the pandemic-hit U.S. economy, India’s happy hours can’t go on indefinitely. To boost anemic investment and jobs, the authorities want credit to perk up. But how long can they wait when easy money is only going into overpriced equities? Leaving aside the local bond market, even bank lending to the corporate sector is refusing to budge.

The central bank can point to 5.3% inflation, within its target range, to postpone the inevitable tightening in its monetary-policy meeting today. Granted, soaring global oil prices will bring discomfort to a country that imports most of its energy. An acute coal shortage at power plants may push inflation higher as steelmakers pay more for the commodity. It may also add to the record September trade deficit of nearly $23 billion. The reassuring news is that India isn’t living hand to mouth, having nearly $650 billion in foreign-exchange reserves, and an overall balance-of-payments that HSBC Holdings Plc expects to remain in surplus for years. Knowing they’re unlikely to lose money from a sudden rupee depreciation, foreigners may keep coming for India’s stocks and bonds.

But the extra dollars arrive with a cost. A rupee that’s too strong compared with trading partners’ inflation-adjusted currencies leads to a loss of competitiveness. That’s probably what’s going on in India. “In a version of the Dutch disease, an overvalued rupee could impede growth in domestic manufacturing and jobs,” says Observatory Group analyst Ananth Narayan.

Surging gold imports often signal nervousness. Some of the heightened demand can be attributed to jewelers. With the virus in retreat, they’re stocking up for the Hindu festive season, which has just begun. But could it also be that having made their money in stocks, rich Indians are buying the yellow metal and Bitcoin because they know that the ultimate source of demand in the economy is weak, and that the currency is artificially high?

As long as the rupee doesn’t roll over, India will get some of the capital fleeing China. But love in the time of Evergrande isn’t forever. The local credit market needs to turn a little less grumpy. Once the Fed starts tapering its balance sheet, the moment may be lost.



[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , ,

RBI extends current a/c freeze deadline, BFSI News, ET BFSI

Banking & Finance

[ad_1]

Read More/Less


Mumbai: The RBI has given banks time until October 31 to comply with its circular on introducing discipline in the opening of current accounts.

The RBI has said that banks should escalate to the Indian Banks’ Association (IBA) any issues they face in implementing the directive, and if it still remains unresolved they should be forwarded to the RBI for regulatory consideration.

According to a PSU bank chief, the RBI in its meeting with public sector lenders made it clear that the circular needs to be implemented in spirit but if there are operational issues faced by customers, they should be resolved at the industry level.

In a fresh circular on the guidelines for current accounts, the RBI reiterated that it does not apply to borrowers who have not availed of cash credit (CC) or overdraft (OD) facility and the banking sectors exposure to them is below Rs 5 crore.

In the case of borrowers who have not availed of CC/OD facility from any bank and the exposure of the banking system is Rs 5 crore or more but less than Rs 50 crore, there is no restriction on lending banks to such borrowers from opening a current account. Even non-lending banks can open current accounts for such borrowers though only for collection purposes.

According to bankers, technically there is no reason for a borrower with CC/OD facility to undertake transactions through another account. Bankers said that the main reason why many borrowers sought to keep a separate current account was to control their collections. “Many customers choose to transfer funds from their other account to repay their loans as they fear that using their loan account for collections could lead to problems when they are short on funds,” said a banker.

However, several businessmen said that while they have old loans with public sector banks, they need the technology-based products of private banks particularly in the area of trade finance. The central bank’s circular comes at a time when some customers in Kerala initiated legal action to stall the implementation of the RBI directives.



[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , , , , ,

Bank loans to industrial sector shrink during Modi rule, BFSI News, ET BFSI

Banking & Finance

[ad_1]

Read More/Less


The share of banks in loans to the industrial sector dropped massively during 2014-2021 even as credit to the retail sector, including home loans, saw a boom.

As per the data, industrial credit fell to 28.9% by March 2021 from 42.7% at the end of March 2014.

“Over recent years, the share of the industrial sector in total bank credit has declined whereas that of personal loans has grown,” the Reserve Bank of India said in its Financial Stability Report.

The environment for bank credit remains lacklustre in the midst of the pandemic, with credit supply muted by persisting risk aversion and subdued loan demand and within this overall setting, underlying shifts are becoming more evident than before, it said.

Loans to the private corporate sector declined from 37.6% in 2014 to 27.7% at the end of March 2021. During the same period, personal loans grew from 16.2 to 26.3%, in which housing loans grew from 8.5% to 13.8%.

Fiscal 2021

Bank credit growth to the industrial sector decelerated 0.8% year-to-date as of May 21, 2021, due to poor loan offtake from the corporate sector.

Growth in credit to the private corporate sector, however, declined for the sixth successive quarter in the fourth quarter of the last fiscal and its share in total credit stood at 28.3 per cent. RBI said the weighted average lending rate (WALR) on outstanding credit has moderated by 91 basis points during 2020-21, including a decline of 21 basis points in Q4.

Overall credit growth in India slowed down in FY21 to 5.6 per cent from 6.4 per cent in FY20 as the economy was hit hard by Covid. and subsequent lockdowns.

Credit growth to the industrial sector remained in the negative territory during 2020-21, mainly due to the COVID-19 pandemic and resultant lockdowns. Industrial loan growth, on the other hand, remained negative during all quarters of 2020-21.”

The RBI further said working capital loans in the form of cash credit, overdraft and demand loans, which accounted for a third of total credit, contracted during 2020-21, indicating the impact of the coronavirus pandemic.

Shift to bonds

The corporate world focused on deleveraging high-cost loans through fundraising via bond issuances despite interest rates at an all-time low. This has led to muted credit growth for banks.

Corporates raised Rs 2.1 lakh crore in December ended quarter and Rs 3.1 lakh crore in the fourth quarter from the corporate bond markets. In contrast, the corresponding year-ago figures were Rs 1.5 lakh crore and Rs 1.9 lakh crore, respectively.

Bonds were mostly raised by top-rated companies at 150-200 basis points below bank loans. Most of the debt was raised by government companies as they have top-rated status.

For AAA-rated corporate bonds, the yield was 6.85 per cent in May 2020, which fell to 5.38 per cent in April 2021 and to 5.16 per cent in May 2021.



[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , , , , ,

Simply Put: Roll-down strategy – The Hindu BusinessLine

Personal Finance

[ad_1]

Read More/Less


Mutual fund houses have been rolling out scheme after scheme, the past several months. Among the ones rolled out are also those that follow what is called the roll-down strategy. Two friends, Sita and Geeta discuss what it is.

Sita: All these years, I was made to believe that equity mutual funds (MFs) are risky and that debt MFs are a safe bet. Now I see debt MF returns fluctuating too. So, where do I invest?

Geeta: Why don’t you invest some money in a roll-down strategy MF scheme?

Sita: What’s that? Is that a scheme where hard-earned money rolls down from my pocket into the wallets of mutual fund houses! Just joking. Can you please explain?

Geeta: Sure. While debt fund returns may not gyrate as much as equity fund returns, they are not all safe. Debt investments suffer from interest rate risk – as interest rates go up, prices of existing bonds fall, hurting MF debt scheme returns. The reverse holds true too.

Target maturity funds and fixed maturity plans (FMPs) follow the roll-down strategy and help minimise the interest rate risk.

Sita: How do they achieve this?

Geeta: Such schemes invest in debt papers of a certain maturity and then hold them till maturity. As time passes, the maturity of these papers and so of the scheme portfolio gradually goes down. And with it, the interest rate risk.

Such schemes offer some degree of return predictability. On maturity, you are returned your original investment plus return.

Sita: From now on I’ll invest only in such schemes to get assured returns.

Geeta: Not so fast. These schemes promise only return predictability and not return certainty. They give you a fair sense of what your returns are likely to be and not what they will be. After all, debt MFs are market-linked products, and nothing is guaranteed.

Sita: I understand. Anything else that I should know?

Geeta: I forgot to mention – all this applies only if you stay invested until the end of scheme maturity.

If you decide to redeem your investment any time before that (of course, FMPs don’t allow premature exit), then the roll down strategy won’t save you from interest rate risk.

Your return can, then be higher or lower than that indicated at the start, depending on whether interest rates have fallen or risen since you invested.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , , , , ,