An open-ended debt scheme predominantly investing in AA and below rated corporate bonds.

Investment Objective of Mahindra Credit Risk Yojana*

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The investment objective of the Scheme is to generate regular returns and capital appreciation by investing predominantly in AA and below rated corporate bonds, debt, government securities and money market instruments while maintaining the optimum balance of yield, safety and liquidity. However, there is no assurance that the investment objective of the Scheme will be realized and the Scheme does not assure or guarantee any returns.

*Source: Scheme Information Document

(Read: What You Should Read In A Scheme Information Document)

Is Mahindra Credit Risk Yojana for you?

Mahindra Credit Risk Yojana (MCRY) is a mutual fund scheme from the stable of Mahindra Mutual Fund. It is an open-ended debt scheme–––a credit risk fund–––that has a mandate to invest predominantly in AA and below rated corporate bonds (excluding AA+ rated corporate bonds).

Under normal circumstances, MCRY will invest a major portion (65-100%) of its asset in AA^ and below rated Corporate Bonds, and at times, could invest some portion (upto 35%) in other debt & money market instruments (including securitised debt).

So typically, MCRY could invest in debt instrument such as corporate debt securities (viz. bonds, debentures, notes, etc. of public and private sector undertakings rated by credit rating agencies), Certificate of Deposits (CDs), Commercial Papers (CPs), government securities (of centre and state), debt securities of government agencies and statutory bodies, Treasury Bills (T-Bills), repos/reverse repos, securitised debt, money market instruments, short-term deposits, investment in mutual fund schemes (in conformity with the investment objectives of the scheme), etc.

Further, MCRY has an enabling provision to invest (upto 10%) in units issued by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trust (InvITs).

From a risk standpoint, since the portfolio will be largely skewed to AA and below rated corporate bonds, MCRY is a medium-to-high risk contender. It would depend on how the fund manager builds the portfolio, how many securities are held —whether well-diversified or holds a compact portfolio.

Thus, Mahindra Credit Risk Yojana is suitable only for investors with a medium-to-high risk appetite and who have an investment time horizon of at least 3 years.

From a tax implication point of view, since MCRY is a debt mutual fund, your gains from long-term investment (i.e. held over a period of 3 years), will be taxable @ 20% with an indexation benefit available. While the short-term capital gains would be taxed as per your tax slab.

Asset Allocation of Mahindra Credit Risk Yojana Fund

The asset allocation of Mahindra Credit Risk Yojana under normal circumstances will be as under:

Instruments	Indicative allocations (% of total assets)		Risk Profile High/Medium/Low
	Minimum	Maximum
AA^ and below rated Corporate Bonds	65%	100%	Medium
Debt* and Money Market Instruments	0%	35%	Low
Units issued by REITs & InvITs	0%	10%	Low to Medium

^ Excluding AA+ rated Corporate Bonds
*Includes securitized debt up to 30% of the net assets of the Scheme

Further, it is stated in the offer document that:

• Investment in Derivatives – up to 50% of the net assets of the Scheme. Investment in derivatives shall be for hedging, portfolio balancing and such other purposes as maybe permitted from time to time.

• All of the Scheme's assets will be invested in transferable securities. The corpus of the Scheme shall not in any manner be used in option trading, short selling or carry forward transactions as stipulated in SEBI Regulations and amended from time to time.

• The Scheme shall not invest in credit default swaps, repos in corporate bonds and foreign securities. The Scheme shall not engage into securities lending and borrowing.

• The cumulative gross exposure through investments in debt securities, money market instruments, units issued by REITs & InvITs and exposure in derivatives' positions shall not exceed 100% of the net assets of the Scheme.

(Source: Scheme Information Document)

Investment Strategy of Mahindra Credit Risk Yojana Fund

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MCRY while will invest mainly in a portfolio of AA rated and below corporate debt securities, the fund manager will seek to:

• Increase the accrual of the scheme;

• Play the movement in the credit spreads; and

• Also look at the term structure of the credit curve while deciding on the portfolio allocation

The fund manager may also initiate tactical allocation in the portfolio according to the prevalent market conditions in order to generate alpha in the scheme.
The fund manager will also seek to play out the yield curve and exploit anomalies if any in the curve, for the portfolio construction after analysing:

• Macroeconomic environment, including future course of liquidity

• Interest rate scenario; and

• Inflation along with other considerations in the economy and market

As regards, the credit evaluation process it will include:

• Analysing the operating environment of the issuer;

• Sector analysis;

• Understanding the business model;

• Management and governance practices;

• Quality of the financials – the past track record as well as the future prospects of the issuer and the overall financial health of the issuer

Risk Guard Process

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The selection of securities would be based on the above “Risk Guard Process”, an in-house research and process framework followed at Mahindra Mutual Fund.  

MCRY may use derivatives instruments (viz. interest rate swaps like Overnight Indexed Swaps (“OIS”), forward rate agreements, interest rate futures) for the purpose of hedging, and portfolio balancing or such other purpose as may be permitted under the regulations and Guidelines from time to time.

Who Will Manage Mahindra Credit Risk Yojana

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Mahindra Credit Risk Yojana will be managed by Mr Rahul Pal.

Mr Pal is the Head – Fixed Income at Mahindra Mutual Fund. He joined Mahindra Mutual Fund in September 2005.

Prior that he was associated with Taurus Mutual Fund as ‘Head – Fixed Income’. He has also worked with Sundaram Mutual Fund as ‘Vice President & Fund Manager-Fixed Income’. In these roles, he was responsible for managing and overseeing the Fixed Income Portfolios. And his overall work experience spans over 18 years.

Mr Pal holds an honours degree in commerce [B.Com (Hons)] from St. Xavier’s College and is a Chartered Accountant (CA).

Currently, at Mahindra Mutual Fund he manages Mahindra Liquid Fund, Mahindra Low Duration Bachat Yojana, and Mahindra Dhan Sanchay Equity Savings Yojana (debt portion).

Fund Outlook for Mahindra Credit Risk Yojana

The Reserve Bank of India (RBI), in the wake of rising inflation, has increased policy rates by 25 basis point (bps) each –––once in the 2nd bi-monthly monetary policy statement for 2018-19 (held in June 2018), and subsequently in the 3rd bi-monthly monetary policy statement for 2018-19 (held August 2018).

The policy repo rate now stands at 6.50%, while there is no change in the neutral stance so far maintained.   

Nonetheless, raising rates successively in two review meetings also means that the RBI is going aggressively to counter inflation and achieve the inflation target of 4%.

The 10-year benchmark yield did move up after RBI’s rate hike, but that seems benign and solaced by comfortable liquidity situation in June and July.

The central bank would keep a close watch on the inflation trajectory and other incoming data variables viz. current account deficit, fiscal deficit, the movement of the Indian rupee against the US dollar, etc. to name a few. Depending on the data, it could hit a pause button or increase rates further.

On the above backdrop, how the fund manager constructs the portfolio is crucial. The longer end of the yield curve could prove risky in the near-term. Plus, since a dominant portion of the fund’s portfolio skewed to AA and below rated corporate bonds, the risk is heightened.

To read PersonalFN’s view, click here.

[Read: Skip NFOs, Instead Consider Building A Strategic Mutual Fund Portfolio ]

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