Bandhan Long Duration Fund: An opportunity in the emerging interest rate environment

With interest rates peaking and the market expecting multiple rate cuts in 2024 by the US Federal Reserve indicating, we are likely to see the beginning of a new interest rate cycle this year. Long duration bond yields have been softening over the past few months and may ease further in anticipation of interest rate cuts. Bandhan Mutual Fund’s New Fund Offer (NFO), Bandhan Long Duration Fund comes in an interest rate environment that is expected to turn favourable in the near term. The NFO opened for subscription on 5^th March 2024 and will close on 18^th March 2024. We will review Bandhan Long Duration Fund in this article.

Macro-economic environment is favourable for bond market

• Declining Current Account Deficit: India’s current account deficit has declined to 1.1% of the GDP in Q2, FY 2024 down from 3.8% of the GDP in Q2, FY 2023.Reducing current deficit will foster a stable interest rate landscape.


• Reducing Fiscal Deficit: India’s fiscal deficit is projected to be 5.8% of GDP in FY 2024 down 0.6% on a YOY basis. The Government is committed to fiscal consolidation roadmap of bringing down the fiscal deficit to 4.5% of the GDP by FY 2026. One of the ways, the government meets fiscal deficit is through borrowings. A lower fiscal deficit is likely to reduce supply of Government bonds which is positive for bond markets.


• Taming inflation: Inflation has been on a downward trajectory despite occasional spikes. The core inflation rate is below 4% for two consecutive months (December and January). Declining inflation raises hopes of rate cuts later this year.
  
  

  

  Source: Bandhan MF



• Favourable global interest rate trends: In its December 2023 FOMC meeting, the US Fed Reserve indicated that it will not hike interest rates and cut rates multiple times in 2024. The effective Fed Funds rate is currently 5.33% and the bond markets have priced in rate cuts that will bring the effective Federal Funds rate (implied overnight rate) to 4.2 - 4.3% by January 2025.

Source: Bandhan MF

Global interest in India’s bonds

Government of India bonds (G-Sec) will be included in JP Morgan Government Bond Index – Emerging Markets in June 2024, which is likely to result in higher FII allocations to Indian bond market. In addition to the JP Morgan Government Bond Index – Emerging Markets, Indian G-Sec may also be part of the JPMorgan (like JADE Global Diversified) and Bloomberg-Barclays Global Aggregate Indexes.

2020 marked the RBI's introduction of rupee-denominated bonds with no foreign ownership limits, a key step towards India's inclusion in JPMorgan's index. We are likely to see an increased global investor interest in India's bonds, driven by China's economic downturn and Russia's exclusion from key indexes, alongside India's robust economic indicators.

What are long duration funds?

Long duration funds invest in debt and money market securities such that the Macaulay Duration of the scheme portfolio is more than 7 years. Since duration is directly related to interest rate risk, long duration funds are more volatile than shorter duration funds. (Bond prices are inversely related with interest rate changes; bond prices go up when interest rates fall and vice versa).

Why invest in long duration funds now?

Long duration funds can be ideal for investors looking to enhance portfolio maturity now to avoid future reinvestment at potentially lower rates.Long duration funds can be attractive investment options when interest rates have peaked and are expected to decline in the near to medium term. Let us assume the yield to maturity (YTM) of a long duration funds is 7.2% and its modified duration is 11 years. If interest rates fall by 50 bps or 0.5%, the Net Asset Value of the fund will appreciate by = Interest rate change X modified duration = 11 X 0.5% = 5.5%. The table below illustrates the potential returns of a long duration fund in different interest rate scenarios.

Source: Bandhan MF, Disclaimer: The above table is for illustration purposes only. Impact of expense, reinvestment, expense, etc is not considered. The impact of the rate hike/cut is considered at the end of Year 1.

Why invest in Bandhan Long Duration Fund?

• Commitment to quality: The fund will predominantly invest in high-quality instrument investments, being positioned in PRC-A i.e. lowest credit risk


• Diverse Opportunities: The fund will explore opportunities across government and corporate bonds, with a duration that could extend anywhere beyond 7 years


• Robust Track Record: Bandhan Mutual Fund (previously IDFC Mutual Fund) has over 20 years of experience in managing active investment strategies across the yield curve.

Who should invest in Bandhan Long Duration Fund?

• Investors looking for relatively higher return and with a tolerance for greater volatility.


• Ideal for long-term investors seeking regular income withdrawal through SWP.


• Suited for those looking to increase their portfolio maturity to minimize reinvestment risks, as interest rates are expected to fall

Investors should consult with their financial advisors or mutual fund distributors if Bandhan Long Duration Fund is suitable for their investment needs.

Bandhan Long Duration Fund

(An open ended long term debt scheme investing in instruments such that the Macaulay duration of the portfolio is greater than 7 years with Relatively High Interest Rate Risk and Relatively Low Credit Risk)

Disclaimer:

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the investment strategy / theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of Bandhan Mutual Fund (formerly known as IDFC Mutual Fund). The information/ views / opinions provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision and the security may or may not continue to form part of the scheme’s portfolio in future. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. The decision of the Investment Manager may not always be profitable; as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. Neither Bandhan Mutual Fund (formerly known as IDFC Mutual Fund)/ Bandhan Mutual Fund Trustee Limited (formerly IDFC AMC Trustee Company Limited) / Bandhan AMC Limited (formerly IDFC Asset Management Company Limited), its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.