Investment in the capital markets always exposes your capital to the risk of volatility and is not suitable for those investors who depend on their savings for livelihood. Short Term Debt Mutual Funds provides an alternative to traditional Fixed Deposit and Monthly Income schemes with higher return and low volatility. These are also known as income funds. The fund invests in Govt. and companies debt instrument and money market instrument of shorter duration of maturity of up to 3 years. These are highly liquid debt instruments and also help the investors to fight inflation. This post looks at the best short term debt funds to invest in India in 2017.
How Debt Funds work
The fund generates its return from interest it receives from bonds and capital appreciation. The bonds are traded at regular market and bond prices are affected by Interest Rates Risk i.e bond price and interest rate moves in opposite direction, credit risk, and inflation. For example: If the interest rate falls in the economy, new debt instruments starts getting issued at newer rates less than previous, then investors start to buy the old bonds which have high rates and the price of bond increases.
Modified Duration: It determines the change in the price of a security in response to a change in the interest rate of 100 basis points.
Best Short Term Debt Funds
- HDFC Short Term Fund
- UTI Banking & PSU Fund
- Indiabulls Short-term Fund
- DHFL Pramerica Short Maturity Fund
- SBI Short Term Debt Fund
- ICICI Prudential Ultra Short Term Plan
- Birla Sun Life Short Term Fund
- Tata Short Term Bond Fund
- Kotak Flexi Debt – Plan A
- Franklin India Low Duration Fund
Comparison Table **
Details of Funds
HDFC Short Term Fund
The fund is known for its moderate credit risk quality and interest rate sensibility. The fund seeks to generate regular income through investment in debt securities and money market instruments. The fund has given a return of 8.1% since inception. The fund has invested a maximum in debentures (64.88%) and balance in the different debt instrument.
UTI Banking & PSU Debt Fund
The scheme seeks to generate steady and reasonable income, with low risk and high level of liquidity from a portfolio of predominantly debt & money market securities by Banks and Public Sector Undertakings (PSUs).
The fund’s modified duration of maturity is 1.2 years. The fund has given 9.56% of return since its launch in January 2014. The fund’s credit quality rating is AAA as funds credit rating breakup is SOV (16.94%), AAA (33.48%), A1+(20.41%).
Indiabulls Short Term Fund
Launched in September 2013, the scheme has low-risk and average return grade. Its return since inception is 8.89%. The fund’s objective is to generate stable returns over short-term with a low-risk strategy while maintaining liquidity through a portfolio comprising of debt and money market instruments. The credit rating of the portfolio is AA rated and has exposure in debentures (44.08%), Commercial Paper (28.29%) and Bonds (14.5%). The fund’s modified duration is 1.43 years.
DHFL Pramerica Short Maturity Fund
The scheme aims to generate a steady return with low to medium market risk by investing in a portfolio of short-medium term debt and money market securities. There will be 65-100% allocation to instruments with an average maturity up to 18 months and up to 35% allocation to instruments with an average maturity greater than 18 months. The fund has performed well in 1yr, 3yr and 5yr time period with the return of 9.53%,9.49%, and 9.32%. modified 2.32 years.
SBI Short Term Debt Fund
The scheme aims to generate regular income with high degree of liquidity by investing in a portfolio comprising of money market instruments and debt securities which should not be rated below investment grade by a credit rating agency. With Asset size of Rs. 9941.4 crore. as on 28th Feb and since inception it has given a return of 8.29%. The fund’s portfolio average credit rating is AAA and is less volatile. Fund’s Modified duration is 1.69 yrs.
ICICI Prudential Ultra Short Term Plan
The fund aims at generating regular income through investments in a portfolio of debt and money market securities of very short maturities while ensuring safety and liquidity of investment. The fund will keep a minimum of 20% of its assets in money market instruments, and the rest in debt market instruments. The fund portfolio’s credit quality rating is AAA. Modified duration of the fund is 2.14 yrs.
Birla Sun Life Short Term Fund
The scheme aims to generate current income and capital appreciation from a portfolio that invests 100% in debt and money market securities. The fund has outperformed the category by 40-60 basis points over three to five years time period. The fund manager skillful management of the portfolio of bonds and money market instruments of short to medium term maturity has helped it to deliver good returns across cycles. The fund has exposure to 25% in SOV, 53% in AAA securities and about 10.5% in AA rated bonds and modified duration of 2.17 yrs.
Tata Short Term Bond Fund
The fund is launched in August 2002, with an objective of modest return with high liquidity from a portfolio of debt and money market instruments. The fund’s three-year and five-year CAGR is 9% and 9.2% in regular option. The fund’s mix of Sovereign bond(10.7%), AAA bonds (54.17%) and AA rated bond (25%) makes it a high-quality low-risk portfolio. The fund’s return since launch is 7.92% and modified duration of 1.54 yrs.
Kotak Flexi Debt – Plan A Fund
The scheme aims to maximize returns through an active management of a portfolio of debt and money market securities. The fund has a good rating Credit Risk Quality and is sensitive to interest rate risk. The portfolio consists of GOI securities(39.9%), Debenture (22.3%), State Development loan (20.1%), Bonds (10%). The fund has outperformed the category by 70- 200 basis points over 1 yr to 5 yr period. Modified duration of the fund is 4.84 yrs. Since inception, the fund has given 8.74% of return.
Launched in July 2010, this scheme has low-risk grade and 9.59% return since inception.The fund aims to earn regular income through investment primarily in domestic fixed income instruments and highly rated debt securities. The fund’s 1 yr, 3 yr and 5 yr, return 10.2%, 9.79%, and 9.81% respectively which higher than category return by 50-100 basis points. The fund has high exposure in the Corporate Debt instrument.
The List of funds is chosen after comparing of different funds on the scales like Return, High Credit Quality of the portfolio and Risk Profile of the fund.
* – This blog post should not be constituted as an advice and investors are requested to do their own due diligence before investing into any of the above-mentioned funds. You can also try out bodhik to get the funds best suited to your profile
** – All the numbers are as of writing of this post i.e 30th March 2017.