Franklin India Income Opportunities Fund: A play on credit opportunities : Business Line

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The RBI has already reduced its key policy rate by 75 basis points this year. Given this cut, the rally in bonds may be tempered, going ahead.

Investors who do not want to take an interest rate risk by investing in long-term gilt funds and prefer more predictability in returns could go with debt funds that follow an accrual strategy. Franklin India Income Opportunities Fund, which invests in debt securities across the yield curve, is a play on credit opportunities in the corporate bond market.

The fund has outperformed its benchmark index consistently over one-, three- and five-year periods. Given its aggressive strategy of betting on lower-rated securities, the fund is suited for investors with a slightly higher risk appetite, and an investment horizon of 18-24 months.

High-yielding bonds

While the fund has not been amongst the top performers in the last one year due to its relatively lower duration, over a long run the fund is a category outperformer.

Over three- and five-year periods, the fund has delivered 9-10 per cent returns.

Franklin India Income Opportunities focuses on high accrual securities, to take advantage of the higher yields. It focuses on getting returns through accrual of interest on the bonds in the fund’s portfolio.

It has invested about half of its portfolio in the last two years in AA rated securities and a fourth in A rated bonds.

Thus, the fund manager takes a selective call on bonds issued by companies in the lower credit segment.

This has helped generate better returns, though the risk is a tad higher than, say, a Birla Sun Life Short Term Opportunities, which predominantly invests in AAA rated bonds.

However the fund’s sound track record of identifying bonds with less default risk — timely payment of interest and repayment of principal — mitigates the risk.

The fund’s top AA rated bond holdings include Shriram Transport Finance, Future Retail, HPCL-Mittal Pipelines, Jindal Steel, JSW Energy and JSW Steel. The fund’s yield to maturity (YTM) is 10.71 per cent with average duration of 2.68 years.

The fund has outperformed the benchmark across various rate cycles. During the rate hike cycle between March 2010 and October 2011, the fund delivered 12.6 per cent return, while during the RBI’s money easing policy between April 2012 and May 2013, the fund has clocked about 14 per cent returns.

This was 2.5-3 percentage points higher than its benchmark. Even during the liquidity tightening phase of 2013, when short-term rates spiked, the fund capped its losses well.