HDFC Medium Term Debt Fund Direct Plan Reinvestment of Income Dis cum Cptl Wdrl Opt INF179KA1NO1

The following text is from Sept. 7, 2023.

Manager Shobhit Mehrotra seeks to add value through security selection rather than taking duration bets; the duration is typically maintained within a thin band. Expectedly, the investment approach relies on fundamental research. It entails combining qualitative aspects with quantitative analysis. The investment team prepares the coverage list with a strong focus on the company management and track record, the financial strength of the promoter group, and corporate governance standards. Meetings with management are followed by rigorous quantitative analysis in which the focus is to get a measure of the company’s creditworthiness. The team studies the company’s cash flow and relevant ratios—leverage, coverage, and solvency. At this step, the team also draws on the expertise of their counterparts in the equity team. The fund company uses a proprietary model in which qualitative and quantitative inputs are used to arrive at a credit score for each issuer. This in turn helps managers determine the exposure they can take to each issuer, thereby acting as a risk-management tool. Mehrotra also adopts a buy-and-hold approach and refrains from churning the portfolio frequently. The strategy has certain inherent risks linked to its exposure in the lower credit space. While the strategy has the wherewithal to deliver impressive long-term returns, it needs to be evaluated from the perspective of changing scenarios in the credit-oriented categories. Given the strength and our conviction in the process, we re-iterate the Above Average score.

The fund is from the medium duration category. Therefore, in line with the category’s investment mandate, its Macaulay duration is maintained between three and four years, and under anticipated adverse situations between one and four years. Shobhit Mehrotra doesn’t deviate from the stated range.

The portfolio is constructed with a philosophy to optimize returns without taking extensive duration or credit bets. Mehrotra places an extensive focus on liquidity and safety and hence prefers investing in government bonds or papers issued by public sector undertakings. As the emphasis on safety is high, the portfolio mainly is composed of securities with high credit quality, which also ensures adequate liquidity in the portfolio. However, investment in sub-AAA rated securities hovers in the range of 30%-35% depending on the investment opportunity. Investments in single A/equivalent rated securities are typically avoided or done in a controlled manner and only in companies where the investment team has high conviction levels. The portfolio is well diversified to mitigate risk. The issue-specific exposure is usually maintained below 10% of the portfolio, and the size of the exposure drops progressively as the financial strength and market cap of a company decrease.

The strategy of keeping unwarranted risk at bay and preferring safety over outsize returns helped the fund navigate turbulent times in the Indian fixed-income markets more comfortably than most of its peers.