7 ultra-short bond funds rated by our analysts

By Morningstar Analysts |  19-01-17 | 
 

Franklin India Ultra Short Bond Fund Retail

  • Expense Ratio: 0.86%
  • Star Rating: 5 stars
  • Analyst Rating: GOLD
  • Turnover: 259%
  • Minimum Investment:  10,000
  • Credit Quality: -
  • Interest Rate Sensitivity: -
  • Fund Manager: Pallab Roy
  • Date of Analysis: November 2016

The manager recognises credit and liquidity risk in a portfolio, especially in a fund such as this where there are substantial inflows and outflows. While it relies on its research strength to mitigate credit risk, which involves rigorous qualitative and quantitative analysis to gauge the creditworthiness of companies, it heeds portfolio construction and conducts regular stress tests to preempt other downside risks, particularly that of liquidity in the portfolio.

You can read the analyst note here.

Franklin India Low Duration

  • Expense Ratio: 0.77%
  • Star Rating: 5 stars
  • Analyst Rating: SILVER
  • Turnover: 144%
  • Minimum Investment:  10,000
  • Credit Quality: Mid
  • Interest Rate Sensitivity: Limited
  • Fund Manager: Santosh Kamath
  • Date of Analysis: November 2016

In our opinion, a skilled manager, strong team, proven investment process, and one of the best asset managers give the fund an edge over its competitors. Moreover, its performance across risk and return parameters since inception in July 2010 has been noteworthy. We retain its Morningstar Analyst Rating of Silver.

You can read the analyst note here.

Franklin India Savings Plus

  • Expense Ratio: 0.85%
  • Star Rating: 4 stars
  • Analyst Rating: BRONZE
  • Turnover: 431%
  • Minimum Investment:  5,000
  • Credit Quality: High
  • Interest Rate Sensitivity: Limited
  • Fund Manager: Umesh Sharma
  • Date of Analysis: December 2016

Despite a high expense ratio, the fund has enough merit to qualify for a Morningstar Analyst Rating of Bronze.

The investment approach is research-intensive in nature, which involves acquiring an in-depth understanding of companies and their operations. Sharma predominantly scouts for securities from the corporate-bond segment that are mispriced and available at attractive yields. The fund’s mandate requires the manager to invest at least 65% of assets in securities with maturities not exceeding 182 days. The manager has the flexibility to take duration bets with the remaining 35% depending on the interest-rate scenario, which could provide an additional kicker to the portfolio.

This gives the fund an edge over its competition as not many funds in the ultra-short bond category are run with such flexibility. Overall, the fund’s average maturity is maintained in the range of six to 12 months.

You can read the analyst note here.

Kotak Treasury Advantage Fund

  • Expense Ratio: 0.52%
  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Turnover: 714%
  • Minimum Investment:  5,000
  • Credit Quality: High
  • Interest Rate Sensitivity: Limited
  • Fund Manager: Deepak Agrawal
  • Date of Analysis: December 2016

The fund's duration had ranged between three months and one year, but from January 2015 the fund house decided to cap duration at six months. The fund is positioned to deliver returns via accrual income rather than duration plays. Hence, credit selection and spread analysis are the main sources of excess return and the focus is on identifying mispriced money market instruments and bonds with strong credit fundamentals.

The fund has done well within its limited duration profile after the change in the fund’s positioning and has been a consistent second-quartile performer. The competitive expense ratio also aids performance.

You can read the analyst note here.

Reliance Medium Term

  • Expense Ratio: 0.60%
  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Turnover: 281%
  • Minimum Investment:  1,000
  • Credit Quality: High
  • Interest Rate Sensitivity: Limited
  • Fund Manager: Anju Chhajer
  • Date of Analysis: December 2016

The main appeal in this fund has been the execution of the strategy. While 70%-75% of the fund’s portfolio reflects the strategic long term view, 25%-30% of the portfolio is invested tactically to take advantage of changes in short-term interest rates.

The fund is positioned differently to the average ultrashort-term fund and maintains higher portfolio duration. Given the higher maturity of this fund compared with peers, investors should note that this fund is likely to underperform in a scenario of a flat to inverted yield curve.

However, we believe the fund is a solid product for investors as it benefits from an experienced and stable management team that has executed the investment process well. We give the fund a Morningstar Analyst Rating of Bronze.

You can read the analyst note here.

Reliance Money Manager

  • Expense Ratio: 0.57%
  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Turnover: 352%
  • Minimum Investment:  500
  • Credit Quality: High
  • Interest Rate Sensitivity: Limited
  • Fund Manager: Anju Chhajer
  • Date of Analysis: December 2016

The main appeal in this fund has been the execution of the strategy with 80% of the portfolio in AAA rated papers and balance in sub-AAA rated instruments. With this strategy, the fund has been able to deliver above-average returns across the tenure. Portfolio liquidity is maintained by investing 40%-50% assets in public-sector undertaking corporate bonds and CDs. The manager avoids taking exposure in sovereign papers but recently has taken marginal exposure in government securities/state development loans with a duration cap of 2.0 years. Chhajer typically avoids investing in bonds rated lower than AA- and similarly avoids investing in papers whose short-term rating is less than A1+. The fund’s lower-duration strategy provides protection from volatility, and hence the portfolio risk (standard deviation) of the fund remains relatively lower with regard to its peers.

You can read the analyst note here.

HDFC Cash Management Fund – Treasury Advantage Plan

  • Expense Ratio: 1.31%
  • Star Rating: 4 stars
  • Analyst Rating: Neutral
  • Turnover: 277%
  • Minimum Investment:  5,000
  • Credit Quality: High
  • Interest Rate Sensitivity: Limited
  • Fund Manager: Anupam Joshi
  • Date of Analysis: September 2016

We maintain a negative view on HDFC Cash Management Treasury's expense ratio, which undermines our building a positive view of the fund's potential.

The annual expense ratio of 1.30% makes the fund one of the most expensive available in the Ultrashort Bond Morningstar Category. In our opinion, this is a significant headwind for its ability to outperform peers on a risk-adjusted basis. The fund is consistently positioned in the third or fourth quartile in terms of its performance. There has also been a change in the manager of this fund. Anupam Joshi has taken up the portfolio management responsibility from October 2015. Though he has prior experience in portfolio management, we need time to build confidence in the manager.

On the positive side, we like the cohesive team approach and highly research-oriented investment process with an emphasis on safety and liquidity.

You can read the analyst note here.

Add a Comment
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Larissa Fernand
Jan 24 2017 11:57 AM
Thank you for pointing that out. The analyst explained that the expense ratio of 0.86% is of Franklin India US/T Bond Retail Growth Option which is closed for fresh investments.<br />The option which is open for fresh investment is Franklin India US/T Bond Super Institutional Growth whose expense ratio is 0.29%. We apologise for that discrepancy. <br />Larissa<br />Editor
Chaitanya Rayabharam
Jan 23 2017 07:29 PM
Analyst note for Franklin India Ultra Short Bond Fund Retail mentions "Its current expense ratio of 0.29% makes it one of the least expensive funds in the category.", but the actual expense ratio seems to be 0.86%. Can you correct the same
KRISHNAN SADASIVAN
Jan 19 2017 05:56 PM
Any views or comments on DHFL Pramerica Low Duration Fund
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