NFO Pick – (Mirae Asset Long Duration Fund)

25 Nov 2024 , 09:37 AM

TIME TO GO LONG ON LONG-DURATION DEBT

Let us first understand what duration is all about and why the Mirae Asset Long Duration Fund is focusing on this particular vector. Duration is the time required for an investor to be repaid the bond’s present value via bond cash flows. A bond investor gets coupon interest every year and gets back the principal at the end of the term. Due to the intermediate coupon payments, the duration of an interest paying bond will always be less than the term to maturity of the bond. Only for zero-coupon bonds, the duration, and the time to maturity of the bond will be one and the same.

More important than the concept is the application of duration. Duration is also a measure of the sensitivity of the bond price to the changes in the interest rates. A bond with longer duration will react more aggressively to changes in interest rates. This applies to interest rate up movements and down movements. That is why; when the rates are expected to fall, the bond investors prefer long duration bonds as they are most likely to generate higher capital gains compared to shorter duration bonds. That is the long behind the Mirae Asset Long Duration Fund. The expectation is that the bond yields should taper in the coming quarters and that will directly benefit a portfolio of long duration bonds.

DO LONG DURATION BOND FUNDS OUTPERFORM WHEN RATES FALL?

One way to answer this question is to look at the benchmark CRISIL Long Duration Debt A-III  Index, and assess the 2-year returns each time the yield has fallen in the last 15 years.

• Between August 2008 and August 2010, the 10-year G-Sec yields fell by 140 bps and during this period, the 2 year CAGR return on the index was 13.5%.
• Between November 2013 and October 2015, the 10-year G-Sec yields fell by 104 bps and during this period, the 2 year CAGR return on the index was 11.6%.
• Between October 2018 and September 2020, the 10-year G-Sec yields fell by 198 bps and during this period, the 2 year CAGR return on the index was 14.9%.
• Between September 2022 and September 2024, the 10-year G-Sec yields fell by 65 bps and during this period, the 2 year CAGR return on the index was 9.2%.

The relationship is quite clear. The sharper the fall in the bond yields, the higher is the excess returns generated by the long-duration bond index.

LONG DURATION BOND FUNDS STILL SCORE OVER BANK FDS

There have been concerns that the new taxation rules would have taken the shine entirely away from the long term bond funds. Under the new rules, in the case of bonds with less than 35% in equities, there will be no long-term and short-term classification. The gains will be treated as other income and taxed at the marginal peak rate applicable. However, one advantage is that coupons are not taxed in the case of bond funds, unlike FDs. This tax deferment results in a better yield on long term bond funds over bank FDs. The return advantage is about 70 basis points in pre-tax terms and about 80 basis points in post-tax terms. This surely gives these bond funds an edge over traditional bank FDs.

WHOM ARE LONG DURATION BOND FUNDS BEST SUITED FOR?

The Mirae Long Duration Bond Fund is a moderate risk bet on falling bond yields in the coming years. Here are the scenarios to capitalize on long duration funds.

• Since this is a long duration fund and is best held for a time frame of more than 7 years, it can be seen as part of your core portfolio. Long term equity / debt matching can be done through such bond funds.
• Since they are more predictable in terms of returns and less volatile over the long run, they can the perfect fit for long term life goals like retirement planning, planning for your child’s education etc.
• For the more aggressive bond fund investors, this can also be part of tactical allocation to only capitalize on the specific period when the rates are falling. This is more of a short term approach for the savvier investors.
• The Mirae Long Duration Fund can also be a tool of tax deferment, which improves the yield over a typical coupon bond.

HOW LONG DURATION FUNDS HAVE PERFORMED IN INDIA?

The Mirae Asset Long Duration Fund is a debt fund NFO that prefers long duration debt in its portfolio to capitalize on falling bond yields in the market. Such long duration funds are essentially government debt funds where the default risk is zero, but the interest rate risk is still there. By positioning at the long duration end of the curve, the fund looks to capitalize on falling bond yields; which can potentially result in capital gains for investors. There are a total of 7 such long duration funds in India as captured in the table below.

Scheme Name	NAV (₹) Direct	Return (%) 1-Year	Return (%) Launch	Daily AUM (₹ in Crore)
Aditya Birla Sun Life Long Duration Fund	12.34	11.28	9.59	155.12
Axis Long Duration Fund	1,189.74	11.46	9.54	510.88
HDFC Long Duration Debt Fund	11.81	11.89	9.44	5,474.22
ICICI Prudential Long Term Bond Fund	92.88	10.73	8.18	1,013.33
Nippon India Nivesh Lakshya Fund	17.37	11.54	9.04	9,043.17
SBI Long Duration Fund	11.96	11.92	9.73	2,641.92
UTI Long Duration Fund	11.69	11.41	9.68	118.55

Data Source: AMFI

The table above provides the performance and corpus of the 7 active long duration funds based on 1-year returns and on returns since inception. Long Duration Funds in India have a total AUM of ₹18,957 Crore. We have not ranked these funds since the variation in returns among the funds is very low.

• Let us first look at the returns on long duration funds over a 1-year period. On a 1-year returns basis, these funds generated maximum returns of 11.92% and minimum returns of 10.73%, which is very limited variation in returns. The average returns over a 1-year period was 11.46%, which is fairly impressive for a debt fund with low to moderate level of risk implicit in the fund.
• Let us turn to the returns on the long duration funds since inception. On this parameter, these funds generated maximum returns of 9.73% and minimum returns of 8.18%, which is low variation once again. The average returns over this period was 9.31% CAGR, which is good. However, there could be variations in the time frame here.

The funds listed above are benchmarked to the CRISIL Long Duration Debt A-III index. Apart from moderate risk in this category of funds, even the risk of volatility is very low.

GLANCE AT THE MIRAE ASSET LONG DURATION FUND NFO

Here are key details of the Mirae Asset Long Duration Fund NFO.

• The NFO opened on November 21, 2024 and closes on December 02, 2024. The fund will open for sale and repurchase at NAV-linked prices from December 09, 2024.
• If one looks at the potential risk class (PRC) matrix, the Mirae Asset Long Duration Fund is classified as low on credit risk but high on interest rate risk. Hence, the overall risk bracket is classified as moderate risk.
• The investment objective of the fund is to invest primarily in high quality and long duration paper; seeking to generate relatively stable returns over the long term. The portfolio McCaulay Duration will be kept at above 7 years in this case.
• There will be no entry load or exit load on this fund, being a long term debt fund in nature. However, notwithstanding the loads, it is suggested that investors hold this fund to match longer term goals, to make the best of the longer duration of the fund.
• The Mirae Asset Long Duration Fund will offer regular and direct plans. In terms of the options, the fund offers the growth and the IDCW plan to investors.
• Kruti Chheta will be the overall fund manager for the Mirae Asset Long Duration Fund, and will be assisted by a team of multi-disciplinary specialists.
• The minimum investment amount in the NFO will be ₹5,000 and multiples of ₹1 and additional purchases will be ₹1,000 and in multiples of ₹1.
• Under the new tax rules effective from July 23, 2024; being a pure debt fund, there will be no classification of long term and short term returns. The tax at the marginal applicable rate will be payable on the overall gains made at the time of redemption.

The Mirae Asset Long Duration Fund offers a good choice of low risk asset class to plan for long term goals with minimal risks of performance variation.