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tion profile are better suited for investors in the cur-
rent environment. “Perpetual bonds of good-quality
banks have been instruments which
We see you actively take exposure to perpetual bonds
across debt and hybrid categories (in your short- have rendered a reasonable carry
duration fund, the exposure is 6 per cent). In the to the funds.”
context of some of the recent events, how risky are
these bonds? Are there any guidelines that you follow
for investing in such instruments, such as maximum The performance of your short-duration fund has been
allocation, select list of issuers, etc.? exceptional over the past one year. What has
We are very conservative while selecting AT1 bonds for contributed to its outperformance?
investments. The papers that we invest in are of those banks ICICI Prudential Short Term Fund was overweight on
where we are comfortable in terms of the existing capitalisa- AA assets since April-end, which was also the time
tion, quality of assets and ability to raise capital. Perpetual when the AA asset class looked very attractive. The
bonds of good-quality banks have been instruments which other factor which aided the fund performance was the
have rendered a reasonable carry to the funds, given that the fund’s overweight stance on duration at a time when
short-term yields on the AAA bonds were low. the yields corrected and reducing duration as the
We have risk-management guidelines across asset yields bottomed out.
classes and across individual credits in terms of sector
limits, asset limits and specific-issuer limits and these What is your approach towards credit exposures in
are monitored closely by the risk-management team. different funds? Your ultra-short-duration fund has a
At ICICI Prudential, we were among the early ones higher exposure to AA+ and below rated papers (32
in the mutual fund industry to establish an in-house, per cent) than short-duration and equity-savings fund
independent risk-management team. The idea here is (15 per cent).
to have a team which is independent of the investment The approach largely is to have up to 20 per cent of
team, without any return targets. All of the due-dili- the portfolio allocated to the AA asset class and the
gence work when it comes to onboarding credit is car- remaining part of the portfolio is invested across high-
ried out in accordance with our Debt Investment est-rated category papers (sovereign, SDLs and AAA
Policy, i.e., SLR (safety, liquidity and return). This corporate bonds). Being a very-short-duration fund,
structure has helped us to mitigate credit risks thus far. the ultra-short fund has higher exposure to AA+ and
below rated papers as compared to the short-term
Across debt funds, you take swap exposures against plan. Being a very short-duration asset class, the ultra-
some portions of the portfolio, which we don’t see in short fund has more flexibility to have higher expo-
many other AMCs. Can you explain the rationale sure to AA assets.
behind this?
The overnight interest swap is used as a strategy to Your short-duration fund has tended towards the
hedge some of the duration risk. At certain points in higher end of the permitted duration band. What
time, hedging with an overnight interest swap is a could be the implications of the current portfolio
much more attractive strategy than selling the bond. positioning if the interest rates were to rise? What are
So, depending on the risk–reward, the fund uses this the risks for an investor with a near-term horizon of,
strategy to hedge portfolio duration risk. As an addi- say, 1.5 to two years?
tional strategy, it aids in generating alpha for the fund. The portfolio positioning since April has changed by
reducing the overall duration. The fund was running a
“The current interest regime largely higher duration. The fund currently is running a medi-

factors the pandemic slowdown and um duration, given that the expectation of recovery
has changed over the last three months. As of January
interest rates will have to normalise 2021, the fund has a Macaulay duration of 1.84 years
at some point in time.” and a modified duration of 1.76 years, with an average
maturity at 2.67 years. Since the fund has reduced
duration, the duration risk has been neutralised.

Mutual Fund Insight March 2021 23
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