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Delivering optimal risk-adjusted returns

Anil Bamboli, fund manager, HDFC Short Term Opportunities Fund, answers our questions on the fund

Delivering optimal risk-adjusted returns

What is your investment objective?
The investment objective of HDFC Short Term Opportunities Fund (HDFC STOP) is to generate regular income through investments in Debt/ Money Market Instruments and Government Securities with maturities not exceeding 36 months.

What is the ideal time frame which an investor should look at while investing in a short-term fund?
As stated in the investment objective of the fund, the maximum maturity of a debt instrument in the portfolio can be 3 years. Given this, the fund, under normal circumstances, is expected to maintain an average maturity under 2 years, effectively capping the risk due to interest rate fluctuations. From a portfolio risk perspective, we recommend an investment horizon of at least 6 to 12 months.

What is your framework of taking a credit call? What kind of credit risk you don't take at all?
Our investment philosophy for fixed income investments stems from the objective of delivering optimal risk-adjusted returns across products. In HDFC STOP, we strive to maintain high credit quality. As on 31st May 2017, over 92% of the portfolio was invested in debt instruments with AAA or equivalent credit rating and remaining 7.5% being invested in AA or equivalent debt instruments*.

We have a rigorous credit evaluation process beginning with the investment committee approving issuers as acceptable in terms of credit quality to create a "credit list" using internal norms to evaluate each issuer for the creditworthiness. Currently we have over 250 issuers in our credit list and our funds can take exposure to only the issuers from this list.

The evaluation process considers a number of financial ratios such as leverage, coverage, and solvency ratios while we also look at other parameters including parentage and track record of the issuer. The fund managers / analysts have regular meetings with the senior management of the issuers with an endeavor to have at least 1 meeting per year with each issuer. Further, we also have exposure limits applicable for each issuer based on an internal quantitative model in terms of absolute amount as well as percentage of scheme. The list of approved issuers and their exposure limits are reviewed on an ongoing basis.

In view of the recent fiasco in short term and liquid funds, what precautions have you taken to avoid a similar situation in your fund?
We are mindful of the risks involved in fixed income investments. While constructing portfolios, safety, liquidity and returns are generally prioritized in that order. As mentioned above we have exposure limits applicable for each issuer based on an internal quantitative model and qualitative parameters in terms of absolute amount as well as percentage of scheme.

What will you attribute the consistent above average performance to?
The scheme has adjusted the portfolio duration based on views of interest rates and shape of the yield curve and also picked relatively undervalued credits based on fundamental analysis.