Debt fund investment: Debt fund managers are shunning roll-down strategy, what it means for investors
In a roll-down approach, a fund maintains a portfolio of bonds that all mature at the same future date. As the maturity date draws nearer, the tenure for which the fund holds bonds reduces (rolls down). Any fresh bond purchases are also aligned with the remaining maturity of the portfolio. This practice makes returns from a bond portfolio relatively predictable in a volatile interest rate scenario.
It was a particularly sought-after tactic in categories like corporate bond funds and banking & PSU bond funds. Unlike the typical open-ended funds, where the fund manager actively shifts the duration profile of the portfolio as per the given mandate, the passive investing approach of the rolldown strategy provides a degree of predictability in returns amidst interest rate fluctuations.
Fewer funds are opting for roll-down
Average maturity (months)
Note: Above funds only include corporate bond funds & banking PSU debt funds. Compiled by ETIG Database. Source: Ace MF
However, some fund managers are now looking to pivot away from the roll-down strategy. There’s an emerging consensus that interest rates will start falling at some point this year. This provides potential for substantial capital gains in portfolios with longer durations. Longer duration bonds benefit more from falling interest rates as bond prices and yields are inversely related.
A few funds that have completed the previous roll-down cycle have now shifted to a more active management of duration. The argument is that falling yields will introduce
