Though labelled as a 'long-term' debt fund, ICICI Pru Long Term Fund has floated to the top of the dynamic-fund category mainly through well-timed tactical calls on interest-rate moves in the economy in the last three years. After functioning mainly as a short-term fund until early 2014, longer-duration calls since mid-2014 have helped this fund notch up a three-year CAGR of well over 10 per cent and end up at the top of its category. Investing mainly in AAA corporate bonds or G-secs, the fund takes negligible exposure to credit risk. However, it is an aggressive fund when it comes to duration calls. From an average maturity of less than a year until 2014, the fund extended its maturity to as much as 19-20 years by 2015-16 to make the most of falling rates. The fund's asset size has also expanded in this period. The fund uses a quantitative model.

The fund's three- and five-year returns show large margins of outperformance vis-a-vis the benchmark and the category. Three-year returns are a good 3 percentage points above peers while five-year returns ace the category by 1.50 percentage points. But with the high duration working against the fund in the past year, relative performance has suffered. While the high portfolio maturity has worked against the fund in the last one year or so, it is likely to pay off as market interest rates follow policy rates southwards. Compared to other dynamic funds, the fund almost wholly avoids lower-rated corporate bonds, with just a 1 per cent long-term corporate exposure by March 2016. The returns are thus quite reliant on a falling-rate cycle playing out.