Debt Mutual Funds: The recent downgrade of a bond held by two schemes of a major fund house has brought risks involved in debt mutual funds back into the limelight.

The recent downgrade of a bond held by two schemes of a major fund house has brought risks involved in debt mutual funds back into the limelight. The episode has shifted the focus on how fixed income mutual funds work and how they should be used in a portfolio.

It is believed that robust portfolio construction (how you allocate your money across different debt mutual funds categories) is the most crucial element to be put in place before buying debt mutual funds or reviewing the funds that you have in your portfolio. A well balanced debt mutual fund portfolio needs to have different elements combined together to deliver superior risk adjusted returns.

There are 3 things to remember while building a MF portfolio:

Do not focus on returns alone: Fixed income instruments suffer from an anchoring effect, the need for a minimum fixed return on the investment. This anchoring effect is especially evident for fixed income investments in India as the country has witnessed a high interest-rate high inflation environment for a considerable period of time.

Thus there has been an anchoring of return expectations to 9-10 per cent annually from debt. Even as interest rates and inflation have started to come down in the last few quarters, the anchoring effect has meant that there continues the desire to derive a 9-10 per cent annual return from a fixed-income portfolio. This has resulted in higher risks being taken to generate the level of return. Ideally return expectations should be set at 1-2 per cent over inflation rates for the next few years to balance the risk return tradeoff.

Combine different strategies: Debt mutual funds serve different purposes — liquid and ultra short-term funds are for parking temporary surpluses, and tend to outperform savings/current accounts in banks where short-term surpluses are typically kept. Accrual oriented funds tend to buy shorter term bonds for a period of 1-3 years and could invest in a combination of higher- and lower-rated bonds. Duration oriented strategies tend to buy longer term bonds to try to take advantage of falling interest rates and create capital appreciation for investors. Dynamic bond funds have the flexibility to decide how the fund manager wishes to allocate the money across the mentioned strategies. In addition, there are also fixed maturity plans ( FMPs) which hold bonds to maturity to try to lock into a certain rate of interest. A clear understanding of each of these strategies is critical, and to combine them together to create a well diversified portfolio is imperative.

Always keep time horizon in mind: Each of the above strategies is suited for a certain holding period and it is therefore critical to match the period with the strategy. A mismatch in holding period expectations and portfolio construction could cause a significant challenge.

Factors like modified duration and average maturities of the portfolio, exit load structures and composition of underlying securities must be monitored. Also remember that long-term capital gain benefits on taxation on mutual funds kick in after a period of three years.

The writer is a certified financial planner and founder of Plan Ahead Wealth Advisors, a Sebi-registered investment advisory firm.

Larsen & Toubro (L&T) stocks will be in focus as the company said on Thursday that it has received shareholders’ approval for raising about Rs 9,600 crore through issuance of various securities, including equity shares and convertible bonds. (Photo: Reuters)

The BSE Sensex and NSE Nifty opened higher on Friday tracking strong global cues. At 9.23 am, Sensex was up 205.63 points at 25,827.80. Similarly, Nifty was up 53.90 points at 7,842.00 during the same time.

Below are the stock that are likely to be in focus today

Larsen and Toubro: Larsen & Toubro (L&T) has received shareholders’ approval for raising about Rs 9,600 crore through issuance of various securities, including equity shares and convertible bonds.

Arvind Limited: The apparels company has marked its entry into the beauty and cosmetics segment through a partnership with SEPHORA, owned by LVMH Moet Hennessy Louis Vuitton, a French Luxury Conglomerate. With this partnership, the company will now manage SEPHORA’s portfolio of 3 stores in Delhi and 1 in Pune.

Vedanta: Mining giant Vedanta Resources has resorted to aggressive cost reduction and workforce reduction in its aluminium segment amid subdued and volatile market conditions globally.

United Bank of India: Sebi on Thursday imposed Rs 2 lakh penalty on state-run United Bank of India (UBI) for violating norms related to debenture trustees.

Raymond Ltd: Company’s unlisted wholly owned subsidiary Silver Spark Apparel has completed the acquisition of Robot Systems for Rs 28 crore.

The BSE Sensex and NSE Nifty declined around 0.40 per cent on Thursday tracking sluggishness in the global market after gloomy Chinese data added to the level of anxiety. (Express photo)

The BSE Sensex and NSE Nifty are likely to open in green on Friday tracking SGX Nifty and global markets.

At 8.19 am (IST), SGX Nifty was up 22 points, or 0.28 per cent, at 7,842.

Asian shares rose on Friday following gains on Wall Street, while the dollar steadied after facing pressure from a rallying yuan and US data that offered no clarity on whether the Federal Reserve might raise interest rates next week.

Hang Seng and Shanghai were up 1.33 per cent and 0.51 per cent at 21,848.69 and 3,214.30, respectively. Nikkei was flat at 18,289.68.

The Dow Jones industrial average rose 76.83 points, or 0.47 per cent, to 16,330.4 on Thursday, the S&P 500 gained 10.25 points, or 0.53 per cent, to 1,952.29 and the Nasdaq Composite added 39.72 points, or 0.84 percent, to 4,796.25.

Back home, key benchmark indices declined around 0.40 per cent on Thursday tracking sluggishness in the global market after gloomy Chinese data added to the level of anxiety.

At our recent meeting, CMD of Concor explained how, post DFC, its network of terminals could aggregate volumes sufficient to run double-stacked long rakes, a significant competitive advantage. Warehousing is the other strong business enabler, where several deals are being negotiated at present (GST to aid growth).

The current business is a reflection of a shallow market, inefficient system and constrained rail capacities. These will gradually improve and cover up the potential hiccups on the costing front (uncertain pricing of DFC, expiry/renewal of land leases). We maintain add.

DFC is likely to change the face of logistics in India, as it makes rolling stock more productive and rail transportation superior. While these benefits should accrue to all rail operators, Concor has key ingredients to make the most of DFC: (1) ability  to fill double-stacked long rakes; (2) making investments to capture incremental traffic; (3) favourably placed once ports grow in size and start preferring certain ICDs over others and (4) transparency and operational flexibility adding to its service offerings.

We revise our estimates to Rs 49.3 and Rs 60.8 from Rs 51 and Rs 64 for FY16E and FY17E, respectively led by (1) lower EXIM volumes (3% y-o-y increase in FY16E from 5% earlier), (2) higher tax rate (23% vs. 20% earlier), (3) other annual report led changes. We revise target price to R1,520 (R1,550 earlier).

ICRA has revised downwards JMT Auto’s long term rating to the Rs 94 crore term loans and the Rs 102 crore fund-based facilities from [ICRA]BBB+(pronounced ICRA triple B plus) to [ICRA]BBB- (pronounced ICRA triple B minus).

Ratings agency ICRA has revised downwards spareparts maker JMT Auto Ltd, and has placed the company’s ratings under watch with negative implications. JMT Auto is about 66.77% owned by Amtek Auto Ltd., and counts Tata Motors Ltd., as it major client.

ICRA has revised downwards JMT Auto’s long term rating to the Rs 94 crore term loans and the Rs 102 crore fund-based facilities from [ICRA]BBB+(pronounced ICRA triple B plus) to [ICRA]BBB- (pronounced ICRA triple B minus). It also has downgraded the short term rating to the Rs. 53 crore non-fund based facilities and to the Rs. 1.00 crore bill discounting facility of JMT from [ICRA]A2 (pronounced ICRA A two) to [ICRA]A3 (pronounced ICRA A three), it said.

“The revision in the ratings take into account the decline in JMT’s turnover and profits during the first quarter of FY16 which, along with the increase in working capital intensity, has led to a deterioration in debt coverage indicators of the company,” ICRA said in a note.

During the first quarter of the current fiscal that began in April, Amtek Auto slipped to a net loss of Rs 157.60 crore from a year earlier profit of Rs 86.08 crore. This has led to a stressed liquidity position in the group, ICRA says. JMT Auto reported a lower net profit of Rs 1.69 crore compared to Rs 3.59 crore a year earlier, while its sales also fell to Rs 84.25 crore compared to Rs 121.59 crore.

The ratings agency further adds that the ratings have been placed on watch with negative implications for lack of clairty on the company’s planned acquisiton of Germany-based REGE Holding GmbH, through its Singapore-based special purpose vehicle. “The total outflow for the acquisition and funding pattern thereof, at a time when JMT’s own performance and that of the parent have witnessed deteriorations, and success of integration of the acquired business with that of JMT, would be key rating sensitivities going forward. Apart from the said acquisition, JMT has sizeable capex plans in various other brownfield and greenfield expansion projects,” it said.

ICRA said it would “continue to monitor the developments and evaluate the impact of the same on the credit risk profile of JMT,” when it gets further details.