Franklin India Dynamic Accrual Fund: Play on low duration corporate bonds

Illustration: Binay Sinha
Launched in March 1997, Franklin India Dynamic Accrual Fund features in the dynamic bond funds category of CRISIL Mutual Fund Ranking (CMFR). It was classified as a credit opportunities fund in CMFR until December 2017.  Since reclassification to the dynamic bond fund category, the fund has been consistently ranked in the top 30 percentile (CRISIL Fund Rank 1 or 2) in the two quarters ended June 2018. Its month-end assets under management (AUM) more than doubled from Rs 13.42 billion in August 2015 to Rs  34.42 billion in July 2018.

Santosh Kamath has been managing the fund for three years; he has over 23 years of experience. Umesh Sharma and Sachin Padwal-Desai have managed the fund for the past 8 years and 12 years, respectively. They have experience of over 18 and 21 years respectively. The fund objective is to generate a steady stream of income through investment in fixed income securities.

Superior performance 

The fund has consistently outperformed its benchmark (CRISIL Composite Bond Fund Index) and peers (funds ranked under the dynamic bond funds category in CMFR - June 2018) over the trailing periods under analysis. It has outperformed the benchmark and peers during the one- and two-year trailing periods despite rising bond yields. 

Relatively lower modified duration than peers and corporate bond allocation led to the ouperformance.  

A sum of Rs 10,000 invested in the fund since April 2, 2002 (inception of the benchmark) would have grown to Rs 32,103 (7.36 per cent CAGR) on August 31, 2018 compared with Rs 31,692 (7.28 per cent CAGR) for the peer group and Rs 29,602 (6.83 per cent CAGR) for the benchmark.

A monthly systematic investment of Rs 10,000 over 10 years (an investment of Rs 1.2 million) would have grown to Rs 1.875 million earning 8.64 per cent per annum (p.a) as on August 31, 2018. A similar investment in the benchmark would have grown to Rs 1.786 million at 7.72 per cent p.a. 

Modified duration 

The fund’s modified duration ranged from 1.59-2.95 years in the last three years. It has maintained lower duration than peers. The fund’s duration averaged 2.08 years during this period against 5.1 years for peers. Corporate bond exposure ranges from 91-98 per cent.  

Portfolio analysis 

The exposure is largely A+/A2+ and below rated securities with allocaiton averaging 65.45 per cent during the past three years. Allocation to AA category and A1 rated securities averaged 24.95 per cent. Allocation to the highest rated debt securities ranged from 0.95 -15.12 per cent. The fund’s yield to maturity (YTM) averaged 10.65 per cent against 7.77 per cent of peers. High exposure to lower rated securities led the fund to deliver higher YTM than peers.  

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