Dec 31, 2016 - Government bond prices declined during the month, with the yield on the ... WPI and CPI over G-Sec Yield,
FIXED INCOME
Credit Markets Our Outlook A credit ratio in first half of FY17 has improved to 2 times, this is among the highest in last 5 years. This improvement goes on to show that the credit cycle has bottomed out. With the commodity prices being stable, commodity-led businesses and financial companies that were heavily invested in these sectors will witness further improvement. As capacity utilisation is low, we do not expect further investment in capital expenditure, thus, these companies are expected to repay their loans and reduce debt, thereby improving the balance sheet. Credit profile of many corporates has been improving and we have witnessed upgrades in our portfolios of companies engaged in various sectors. Therefore, it reflects that economic recovery cycle is well underway, and that the credit market is gradually improving. Source: CRISIL
Money Markets Our Outlook Money markets rates have risen in the course of last one month. Certificate of Deposit (CD) across maturities saw rise in rates of around 5 to 23 bps, whereas Commercial Papers (CP) saw sharp rise in the 3, 6 and 12 months segment of around 25 to 40 bps. The rates spiked because of events like Monetary Policy stance, Fed Rate hike and improved macro-economic data in the USA. Average liquidity was in surplus at Rs 1.53 Lakh Cr. vis-a-vis the surplus of Rs 1.43 Lakh Cr. in November 2016. Going forward we expect money market rates to stay low amidst surplus liquidity. Source: RBI, CRISIL Centre for Economic Research (CCER)
Fixed Income Outlook Government bond prices declined during the month, with the yield on the 10-year benchmark – the 6.97%, 2026 paper – advancing to 6.51% on December 30, 2016, compared with 6.24% on November 30, 2016. Gilts were primarily affected by the RBI’s decision to keep interest rates unchanged and as the minutes of the Monetary Policy Committees (MPC’s) meeting dampened expectations of interest rates being lowered in the near term. Gilts were dented further, after the US Federal Reserve hiked its key rates and suggested that it could tighten its monetary policy at a more aggressive pace than was previously expected. The dot plot of interest rate estimates from the committee members suggest that a cumulative increase of 75 bps could be in store for 2017, as against 50 bps implied earlier. Subdued appetite for debt ahead of the year-end also weighed on prices.
However, a further decline in gilts was halted on the back of intermittent value buying, favourable domestic consumer inflation figures, comfortable liquidity situation and expectation of firm demand for dated securities at a weekly debt sale. Bonds were also supported after the RBI announced that the incremental CRR requirement would be withdrawn from December 10, 2016. Historically, fixed income space has generated returns during the process of deleveraging. In line with this view, we believe that the outlook for fixed income is expected to be reasonably good for the next six to twelve months. Furthermore, we believe that more investors are likely to turn to fixed income schemes as traditional investment avenues could lose their lustre. Over the last five years, gold has given negative returns in US dollar terms while real estate too has hardly delivered any returns globally. On the other hand, financial savings have witnessed an unprecedented spurt since 2013. We believe monetary policy has turned more accommodative under the new Governor and the monetary policy committee (MPC). Further, the impact of demonetisation might not be transitory and with continued soft inflation, only a modest recovery in growth, weak private capex (capital expenditure), and a healthy Balance of Payment (BoP) position, RBI could cut interest rates. We believe most part of the fixed income rally has already played out and returns are expected to be moderate from hereon. However, over next three year period Fixed Income may continue to deliver reasonable post tax returns relative to traditional fixed income investment avenues. New investments are recommended in dynamic duration, short duration and accrual funds as they may offer better risk adjusted returns. Investors could aim to book profits in Income and Gilt funds systematically over the next 6 to 12 months and switch to short duration funds.
Debt Valuation As per our debt valuation index, investors should invest in moderate duration products now. Debt Valuation Index
Debt Valuation Index considers WPI and CPI over G-Sec Yield, Current Account Balance and Crude Oil Movement for calculation. Equal weights are assigned to each of these parameters for calculating the index.
Our Recommendation With the valuation index in the moderate duration range, existing investors could aim to book profit in long duration funds in Income and Gilt funds systematically over the next 6 to 12 months and switch to short duration funds. For new allocations we recommend short, dynamic duration and accrual based funds. FIXED INCOME RECOMMENDATIONS Aggressive investors with 3 years of investment horizon: ICICI Prudential Long Term Plan
This fund can dynamically change duration strategy based on market conditions
Investors with moderate risk appetite: These funds with short to medium ICICI Prudential Dynamic Bond Fund duration could give better riskICICI Prudential Short Term Plan adjusted returns. Investors seeking to earn from Accrual + Duration: ICICI Prudential Regular Savings Fund ICICI Prudential Corporate Bond Fund ICICI Prudential Regular Income Fund (Income is not assured and is subject to the availability of distributable surplus.)
These funds are better suited for investors looking for accrual strategy.
ICICI Prudential Short Term Plan It is an open-ended income fund. It aims to generate accrual income from the
Why ICICI Prudential Short Term Plan?
interest rates prevailing in the economy. In addition, seeks to derive benefit from any potential mark-to-market returns by tactical, calibrated and opportunistic approach to Government securities.
•The Fund endeavors to generate risk adjusted returns by maintaining a fair balance between duration and yield. •The Funds aims to benefit from capital appreciation through active management of G-Sec and active duration management. •The fund also aims to maintain reasonable yield by investing in high rated corporate bonds.
Investment Approach Focus on accrual income and capital appreciation
Duration in 1.5 to 3.5 years range
2.86 Years
3.68 Years
Modified Duration
Average Maturity
Yield To Maturity
7.54%
Tactical Gsec Call Data as on 31st December, 2016
ICICI Prudential Corporate Bond Fund Our Recomendation The Fund focuses on accrual income by endeavoring to invest into medium- to long-term corporate bonds available at a spread over current market yields.
Why ICICI Prudential Corporate Bond Fund?
The Fund aims to generate higher carry (interest income) along with due emphasis
•The Fund aims to provide benefits of both worlds; ACCRUAL
on credit quality and liquidity.
&DURATION. It aims to maintain reasonable Yield to Maturity (YTM)
The Fund intends to generate reasonable returns by investing predominantly in the
and a moderate duration.
1-7 year maturing corporate bonds.
• It maintains a fair balance between the two and aims to generate returns in both market conditions—rising as well as falling interest rates. •Investors who have moderate-risk appetite and wish to invest in
Investment Approach
corporate bonds with an aim to earn returns predominantly through accruals and partly from potential capital appreciation may consider in this fund.
Hold Till Maturity approach with focus on accruals
Total Return Bias - Accruals plus Capital Gains
Static Duration Management in 2 - 3 years range Data as on 31st December, 2016
2.58 Years
3.40 Years
Modified Duration
Average Maturity
Yield To Maturity
8.23%
ICICI Prudential Dynamic Bond Fund The Fund aims to actively manage duration in the range of 1-5 years and generate potential capital appreciation. The Fund aims to generate total return with emphasis on high credit quality.
Why ICICI Prudential Dynamic Bond Fund? •The Fund intends to minimize liquidity, credit and interest rate risk by investing in liquid and good quality fixed income securities along with active duration management. •It seeks to provide fair blend of accrual income and potential capital appreciation by following total return approach. •The Fund endeavors to limit the modified duration up to 5 years in
Investment Approach
the current market conditions. •Investors who wish to benefit from favorable interest rate movements with limited duration risk may consider investing in this fund.
Active Duration Management in 1 - 5 years range
Invests in a mix of G- Sec and Corporate Bonds
4.83 Years
7.16 Years
Modified Duration
Average Maturity
Yield To Maturity
7.63%
High Credit Quality Data as on 31st December, 2016
Our Recomendation ICICI Prudential Long Term Plan It is an open-ended income fund. It aims to generate accrual income from the interest rates prevailing in the economy.
Why ICICI Prudential Long Term Plan?
In addition, seeks to derive benefit from any potential mark-to-market returns by
•The Fund intends to generate potential capital appreciation by
tactical, calibrated and opportunistic approach to Government securities.
following model based dynamic duration management that will enable the fund manager to systematically manage interest rate risk. •The Fund based on the CAD model will aim to maintain high duration when interest rates are high, and maintain low duration when interest rates are low. This will help in capturing interest rate
Investment Approach
cycles from both sides over a longer period of time. •Investors who wish to benefit from changing interest rate cycles with controlled interest rate risk may consider investing in this fund.
Model Based Duration Calls
Dynamic Duration ranging between 1 - 10 years
High Credit Quality Data as on 31st December, 2016
5.71 Years
9.25 Years
Modified Duration
Average Maturity
Yield To Maturity
7.51%
ICICI Prudential Regular Income Fund (Income is not assured and is subject to the availability of distributable surplus.)
ICICI Prudential Regular Income Fund (Income is not assured and is subject to the availability of distributable surplus.) is an open-ended income fund that intends to generate regular
income through investments in fixed income securities and capture arbitrage opportunities by investing in equity and equity related instruments.
Why ICICI Prudential Regular Income Fund?
(Income is not assured and is subject to the availability of distributable surplus.)
•The Fund intends to generate reasonable returns across all interest rate cycles and thus can be suitable for investments at any given point of time. •The fund intends to generate stable accrual returns with lower volatility by holding its investments till maturity. •The fund endeavors to invest in relatively high yielding debt
Investment Approach
instruments and intends to deliver tax efficient returns (Indexation benefit after 3 years)* •Investors who have moderate risk appetite and wish to earn stable accrual returns may consider investing in this fund.
Researched Credit Calls
Hold till maturity approach with Focus on Accruals
0.99 Years
1.15 Years
Modified Duration
Average Maturity
Yield To Maturity
8.65%
Around 5% Arbitrage exposure Data of debt component as on 31st December, 2016
ICICI Prudential Regular Savings Fund Our Recomendation Aims to generate returns mainly in the form of accrual income and partly through potential capital appreciation, as it holds papers with moderate duration.
Why ICICI Prudential Regular Savings Fund?
Invests in well researched corporate bonds offering relatively high yield. Also,
•The Fund intends to generate reasonable returns across all interest
intends to take advantage of internal credit research to generate credit alpha
rate cycles and thus can be suitable for investments at any given
(Gains form credit rating upgrade) for the portfolio with limited risks.
point of time. •The fund intends to generate stable accrual returns with lower volatility by holding its investments till maturity. •The fund endeavors to invest in relatively high yielding debt instruments and intends to deliver tax efficient returns (Indexation
Investment Approach
benefit after 3 years). •Investors who have moderate risk appetite and wish to earn stable accrual returns and have 3 years and above investment horizon may consider investing in this fund.
Hold till maturity approach with focus on accruals
1.88 Years Researched credit calls
Static duration management Data as on 31st December, 2016
Modified Duration
2.39 Years Average Maturity
Yield To Maturity
9.09%
IC IC I P ru d en tial S h o rt T erm P lan is su itab le fo r in v e sto rs wh o are se ekin g *: Short term income generation and capital appreciation solution A Debt fund that aims to generate income by investing in a range of debt and money market instruments of various maturities. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them
IC IC I P ru d en tial R eg u lar S av in g s Fu n d is su itab le fo r in v esto rs wh o are seekin g *: Medium term savings solution A Debt fund that aims to deliver consistent performance by investing in a basket of debt and money market instruments with a view to provide reasonable returns while maintaining optimum balance of safety, liquidity & yield. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them IC IC I Pru d en tial C o rp o rate Bo n d Fu n d is su itab le fo r in ve sto rs wh o are seekin g *: Long term savings solution A Debt Fund that invests in debt and money market instruments of various maturities with a view to maximize income while maintaining optimum balance of yield, safety and liquidity. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them IC IC I Pru d en tial L o n g T erm Plan is su itab le fo r in ve sto rs wh o are se e kin g *: Medium Term Savings solution A Debt fund that invests in debt and money market instruments with a view to maximize Income while maintaining optimum balance of yield, safety and liquidity. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them IC IC I Pru d en tial D yn am ic Bo n d Fu n d is su itab le fo r in ve sto rs wh o are see kin g *: Medium term wealth creation solution A Debt Fund that invests in debt and money market instruments with a view to provide regular income and growth of capital. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them IC IC I Pru d en tial R eg u lar In co m e Fu n d (Income is not assured and is subject to the availability of distributable surplus.) is su itab le fo r in vesto rs wh o are see kin g * : Medium term regular income solution A hybrid fund that aims to generate regular income through investments primarily in debt and money market instruments and long term capital appreciation by investing a portion in equity *Investors should consult their financial advisers if in doubt about whether the product is suitable for them
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
