HDFC GILT Fund LTP Jan 2015.pdf

8/17/2019 HDFC GILT Fund LTP Jan 2015.pdf

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HDFC GILT FUND-LONG TERM PLAN(Open - ended Income Scheme)

Still remains the best positioned Fixed Income Opportunity

This product is suitable for investors who are seeking*:

credit risk free returns over medium to long term.

investment in sovereign securities issued by Central/ State Government with

medium to long term maturities.

Low risk (BLUE)

* Investors should consult their financial advisers if in doubt about whether the

product is suitable for them.

Note: Risk is represented as:

( BLUE) investors understand that their principal will be at low risk

(YELLOW) investors understand that their principal will be at medium risk

(BROWN) investors understand that their principal will be at high risk

* Based on portfolio positioning vis-a-vis Interest rate Outlook

*

January 16, 2015


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Key interest rate determinants and their outlook

• Inflation - CPI in Dec 14 was at 5.0%; likely to remain low

• CAD - FY15 estimated to fall to 1.5% and next year to 0.5%

• Fiscal Deficit - 4.1% in FY15 challenging, but gradual consolidation to continue

• US Interest rates - Inspite of a possible Fed hike in 2015, US 10 yr and German 10yr have rallied by 0.86 bps and 1.49 bps in CY2014

Source: Budget documents, publicly available information, internal estimates

Most indicators point towards lower interest rates


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Key macro economic indicators : Sharp improvement

• Falling Fiscal deficit (FD) &

CAD. Stable INR

• Sharp fall in Oil and other

commodity prices

• Low MSP growth

(MSP – Minimum Support Prices)

(Cereals have a 14.6% wts in CPI)

Source: Citi, INR VS USD is avg. for the fiscal year, E - Estimate

Source: Bloomberg

Source: Kotak, CLSA

in USD Two Year Peak Jan 15 Change (%)

Crude Oil 119 49 -59%

Coal 94 62 -34%

Aluminium 2168 1774 -18%

Iron Ore 985 505 -49%

Copper 378 251 -34%

Rice 17 11 -34%

Wheat 791 538 -32%

Sugar 20 15 -24%

Cotton 95 59 -38%

FY13 FY14 FY15E FY16E

FD (% to GDP) 4.9 4.5 4.1 3.9

CAD (% to GDP) 4.7 1.7 1.5 0.5

INR vs USD 54 60 62 60


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Commodity price fall becoming widespread

Source: JP Morgan, Bloomberg

• China that accounted for almost the entire demand growth of commodities in last 13 years* is slowing

• On the other hand, supply is improving for oil / iron ore etc.

*

*

Source: Citi E - Estimate

Source: JP Morgan

100

150

200

250

300

350

400

450

500

Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14

0

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S&P GSCI Industrial Metals Brent Crude


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Key drivers for lower oil prices : Increasing supply, weak demand

• Production in Egypt, Nigeria, Sudan, Libya, Iran,

Syria and Iraq is not falling anymore while

production of Shale oil continues to increase in the

US

• Falling VMT in US - economic slowdown, e-commerce ? (VMT : Vehicle Miles Traveled per year)

• Rising mileage

• Demand for oil in US (>20% of world demand), is thus

not rising Source: Bloomberg

Source: Publicly available informationSource: Bloomberg


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CAD in balance : Is it possible?

Source: Citi

• Can such large savings result in INR appreciation despite global dollar strength ?

** Six weeks lagged prices due to Indian oil importers credit period, E – Estimates

Source: Citi, CMIE, Bloomberg


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Indian Interest rates : High compared to global rates**

Source: Bloomberg

Indian yields are the highestamongst large economies

compared to pre crisis levels

This points to material room for fallin interest rates

in India*

* HDFC Mutual Fund/AMC is not guaranteeing/offering/ communicating any indicative yield on investmentsmade in any of its existing/proposed schemes to be launched.

10 yr G-sec (%) 12-Sep-08 15-Jan-15 Chg in yld

India 8.28 7.68 -0.60

China 4.05 3.65 -0.40

Japan 1.54 0.35 -1.19

USA 3.72 1.84 -1.88

Italy 4.84 1.74 -3.10

UK 4.60 1.52 -3.08

France 4.41 0.67 -3.74

Germany 4.19 0.48 -3.71

**Above comparison of yields rates has not factored CAD, Inflation and other drivers of yield rates.


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Indian yields* very high in global context: Above PIGS

* HDFC Mutual Fund/AMC is not guaranteeing/offering/ communicating any indicative yield on investmentsmade in any of its existing/proposed schemes to be launched.


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Real Rates near all time high – supportive of lower yields*

Source: Bloomberg, BAML,

Positive real interest rates after 5 years

*HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns

on investments made in this scheme

Real interest rate = Difference be tween CPI & 10Yr Gsec Yield

-10

-8

-6

-4

-2

0

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D e c - 0 5

J u n - 0 6

D e c - 0 6

J u n - 0 7

D e c - 0 7

J u n - 0 8

D e c - 0 8

J u n - 0 9

D e c - 0 9

J u n - 1 0

D e c - 1 0

J u n - 1 1

D e c - 1 1

J u n - 1 2

D e c - 1 2

J u n - 1 3

D e c - 1 3

J u n - 1 4

D e c - 1 4


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Rise in US interest rates : A possible risk ?

• Spread between US treasury and Emerging market corporate bonds has come down (Chart 1)

• However, Spread between India & US treasury is close to all time high (Chart 2)

This creates room for lower rates in India, even if US yields rise

Chart 1 Chart 2

Source: Bloomberg, Credit Suisse ; Chart 1: The data updated till 12th Jan, 2015, Chart 2: The data updated till 14th Jan, 2015.


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RBI cuts by 25bps in inter-policy move

• CPI to stay below RBI’s glide path – RBI now expects inflation to be

below its 6% target by Jan-16

• Household Inflation Expectations have moderated to single digits for the

first time in 5 years, adapting to the recent decline in inflation

• Guidance Hints at Further Easing: The guidance mentions that

further easing will be dependent on “data that confirm disinflationary

pressures… and sustained high quality of fiscal consolidation”.

Source: RBI policy dated 15-01-2015

Key Takeaways


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HDFC Gilt Fund LTP – Best suited for a 3 year horizon*

• While inflation has come down, inflationary expectations & wage inflation is likely to take

longer to fall; Also, there is a likelihood of US rates hike in 2015

• In view of the above and RBI’s resolve to “break the back of inflation”, rate cuts are likely

to be slow & gradual thus extending the rate cut cycle

• Investments in debt funds over 3 years attracts long term capital gains tax

*HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed returns oninvestments made in this scheme

+

+In view of the above, a 3 year investment horizon is ideal for HDFCGILT FUND –LTP.


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Risk Reward Outlook

Risks• Longer the maturity of gilt funds, the higher likely capital gain or loss

• Highly sensitive to interest rate movements compared to debt/income funds

Rewards• Current Portfolio strategy focuses on maintaining high modified duration in the range of 8-

10 till interest rates fall materially

• Given our view of a fall in interest rates in the medium to long term, there is a potential forcapital gains# (refer next slide for simulation)

• Suitable for investors with a longer investment horizon



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Simulation for G-sec security

Given below is the simulation of likely return* of a ~18 year bond namely 8.32%GOI 2032 (modified duration ~ 9 and YTM 7.83%), under various scenarios

•XIRR returns for the instruments assuming the fall in yield at the end of the respective period; without factoring re-investment risk

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*HDFC Mutual Fund/AMC is not guaranteeing/offering/communicating any indicative yields or guaranteed

returns on investments made in this scheme

Note 1: Above data shown is hypothetical in nature and based on assumptions, do not reflect actualinvestment results, and are not guarantees of future results. Changes in such assumptions couldproduce materially different results.

Note 2: Instrument referred above are not recommended by HDFC Mutual Fund/HDFC AMC. Thescheme may or may not have any present or future positions in the said instrument.

Chg in yld

/ tenor

(days) 1.50% 1.25% 1.00% 0.50% 0.00% -0.50% -1.00% -1.25% -1.50%

740 2.0% 2.9% 3.9% 5.9% 8.0% 10.1% 12.4% 13.6% 14.8%

1110 4.2% 4.8% 5.4% 6.7% 8.0% 9.3% 10.7% 11.4% 12.1%

1475 5.3% 5.8% 6.2% 7.1% 8.0% 8.9% 9.9% 10.3% 10.8%

1850 6.1% 6.4% 6.7% 7.3% 8.0% 8.7% 9.4% 9.7% 10.1%


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Summary

Falling inflation, CAD & fiscal deficit, FII interest in Indian debt, high spread between Indian

and US 10 year, near 2% real yields and above average yields…..are all pointing towards

lower yields over the medium term.

A 3 year investment horizon is recommended as it will help increase the tax efficiency**

HDFC Gilt Fund – Long Term Plan is ideally positioned to benefit from lower rates*


**In view of the individual circumstances and risk profile, each investor is advised to consult his / her professional advisorbefore making a decision to invest.

+


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Summary of recent Fixed Income presentations of HDFC Mutual Fund

Presentation & Date Outlook

“Fixed Income Update” – March 12, 2014 Interest rates to moderate across the yieldcurve in FY14-15

“Next RBI move : Rate cut ?” – January 28, 2014 Lower rates, though timing is uncertain

“Last hike or no hike” – December 17, 2013 Lower interest rates

For complete presentation please refer website, www.hdfcfund.com


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Product Features

Type of Scheme Open-ended Income Scheme

Investment Objective To generate credit risk – free returns through investments in sovereign securities issued by the Central Government and / or aState Government

Inception Date July 25, 2001

Load Structure Entry Load: Not Applicable

Upfront commission shall be paid directly by the investor to the ARN Holder (AMFI registered Distributor) based on theinvestors’ assessment of various factors including the service rendered by the ARN Holder.

Exit Load: Nil

Investment Plans Long Term Plan, Long Term Plan - Direct Plan

Investment Options Each Plan offers Growth and Dividend Options. The Dividend Option offers Dividend Payout and Reinvestment facility.

Minimum Application Amount

(Under each Plan / Option)

Purchase: Rs 5,000 and any amount thereafter

Additional Purchase: Rs 1,000 and any amount thereafter

Benchmark Index

Long Term Plan: I-Sec Li-Bex

For further details please refer Scheme Information Document

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Asset Allocation Pattern

Types of Instruments Long Term Plan Risk Profile of theInstrument

Normal Allocation Normal Deviation

Government of IndiaDated Securities

75 25 Sovereign

State GovernmentsDated Securities

15 15 Low

Government of IndiaTreasury Bills

10 10 Sovereign

In addition to the securities stated in the table above, the respective plans may enter into repos / reverse repos as may be permitted bythe RBI / SEBI

Under normal circumstances, the asset allocation (as a % of net assets) of the Scheme’s

portfolio will be as follows:

For further details please refer Scheme Information Document 19


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Portfolio Composition (As on December 31, 2014)

Portfolio Classification by Asset Class (%)

Long Term Plan

Government Securities 97.53

Cash, Cash Equivalents and Net Current Assets

2.47

Additional Information:

Average Portfolio Maturity (years)*: 21.17Modified duration (years)*: 9.35

Yield to Maturity*: 7.96%

Average AUM (Rs in crore): 578.63**

** Average AUM for the quarter ended December 31, 2014

* Computed on the invested amount

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Glossary

CAD - Current Account Deficit

FD - Fiscal Deficit

MBPD- Million barrel per day

CPI - Consumer Price Index

XIRR - Returns the internal rate of return for a schedule of cash flows that is not necessarily periodic.

PIGS – Portugal, Italy, Greece and Spain

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DISCLAIMER

The views expressed herein are based on the basis of internal data, publicly available informationand other sources believed to be reliable. Any calculations made are approximations, meant asguidelines only, which you must confirm before relying on them. The information contained in thisdocument is for general purposes only and is not an offer to sell or a solicitation to buy/sell anymutual fund units/securities. The document is given in summary form and does not purport to becomplete. The document does not have regard to specific investment objectives, financial situationand the particular needs of any specific person who may receive this document. The information/data herein alone are not sufficient and should not be used for the development or implementation

of an investment strategy. The same should not be construed as investment advice to any party.The statements contained herein are based on our current views and involve known and unknownrisks and uncertainties that could cause actual results, performance or events to differ materiallyfrom those expressed or implied in such statements. Neither HDFC Asset Management Company(HDFC AMC) and HDFC Mutual Fund (the Fund) nor any person connected with them, accepts anyliability arising from the use of this document. The recipient(s) before acting on any informationherein should make his/her/their own investigation and seek appropriate professional advice andshall alone be fully responsible / liable for any decision taken on the basis of information containedherein.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEMERELATED DOCUMENTS CAREFULLY.

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Thank You

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