Short duration funds - Decoded
MF shots (part 6)- is an exclusive series of article which will try to explain in each category of mutual fund that exists. This article focuses on Short Duration funds which invest for 1-3 years.
Proud to announce that I have received Mutual Fund Distributor license after completion of necessary formalities. In case you have mutual fund queries or would like to invest in mutual funds, let me know on my Email - chirag.jain48@yahoo.com or +91-7567473055.
AMFI registration number - ARN-187955
Estimated Time to read - 5 minutes
Before we understand about short duration funds, here’ a recap of other short term debt funds I have covered till now –
Overnight fund – invests in securities with maturity of 1 day.
Liquid fund – invests in securities with maturity of 91 days.
Ultra short duration funds – invests in securities with maturity of 3-6 months
Low duration funds - invests in securities with maturity of 6 months to 1 year.
Money market funds - invest in securities with maturity upto 1 year.
Brief -
An investor tends categorize money into different buckets based on varying goals & varying time horizon of a goal. The debt mutual funds too have multiple sub categories which have different objective to be fulfilled. Short duration fund category is appropriate for investors looking to invest for 1-3 years. This article tries to explain the category, parameters to check before investing & what pitfalls one should try to avoid.
Investment objective –
It invests in securities with maturity of 1 to 3 years. The category has garnered 1.41 crores of AUM which is similar to trend seen in all other categories of short term debt mutual funds of high AUM compared to AUM seen in equity mutual funds.
Suitable for which type of goals –
For goals having maturity more than 1 year upto 3 year like accumulating for vacation or any other particular goal/liability of short duration.
Risk levels –
The risk levels are moderate to high as the funds try to generate return higher than short term funds. The category majorly (50%+) invests in corporate securities for increasing average yield of portfolio & some (approx. 20%) in government securities for liquidity & meet short term needs as they are relatively liquid compared to corporate securities.
What parameters to check –
1. Distribution of corporate versus government securities –
The portfolio allocated to corporate securities versus government securities is key. If fund has too low/ no investment in government security then fund might face issue to pay investors on redemption requests.
2. Credit rating of overall portfolio –
Lower credit rated securities (BB rated & below) yield higher than BBB+ rated securities. The manager might overweight them which might initially show higher returns but if defaults occur it might reduce the capital of fund.
3. Maturity of investments held in portfolio –
The fund should be invested in a manner which balances portfolio returns & maturity of portfolio.
4. Fund Manager -
As there is significant active management done to decide on securities & maturity of fund, the number of funds managed & experience of manager needs to be looked upon.
What to avoid
1. Too high investment in low credit rated companies –
Lower credit rated companies have higher probability of default & high allocation to them might erode capital of investor in case of default.
2. Very high expense ratio -
The returns are usually in the range of +/- 1-2% of short term government securities return. A high expense ratio (like in BOI AXA short term fund has 0.85%) will reduce net return to the investor.
Interesting insights from this category –
1. It has higher allocation to corporate securities compared to other short term funds.
2. Average expense ratio of category at 0.35% is relatively higher compared to other short term debt funds
3. Top 10 funds by AUM have 90% (1.27 lakh crore) of funds, representing a concentrated category.
4. Lowest expense ratio is of Indiabulls short term fund of 0.13% & highest of BOI AXA short term income fund of 0.82%
5. Sundaram short term debt mutual fund holds 7% of government securities which has enabled it to earn higher than average returns in the recent past.
Concluding thoughts -
The category on an overall basis seems to be appropriate for time horizon 1-3 years. returns are compareable with those offered by alternatives. In no way past returns are reflective of future should be kept in mind. One should try to find out how asset allocation of portfolio is made & about fund manager. Too high returns earned by fund should be looked be highly cautiously, as the returns might not be sustainable into the future.
Holding a mutual fund which you can’t analyze? Let me know in the comments, would definitely try to analyze it.
Notes -
The complete file of short duration funds can be accessed here.
Top 10 funds by AUM
10 funds which have lowest expense ratio