As the name suggests, these funds invest in corporate bonds, government securities/state development loans, and money market instruments such that the Macaulay duration of the portfolio is between 1 to 3 years. Macaulay duration is the weighted average term to maturity of the cash flows from a bond.
The category has delivered 7.07% return over a one year period. Aditya Birla Short Term Fund has delivered the highest return at 10.99% while BOI Axa Short Term Income has yielded negative -3.09% over a one year period.
Here are three short duration reviewed by our analysts in the recent past.
HDFC Short Term Fund
- Star Rating: 5 stars
- Analyst Rating: Silver
- Average Credit Quality: AAA
- Fund Manager: Anil Bamboli & Anand Laddha
- Inception: June 2010
- Return: 9.04% (1 year), 8.63% (3 year), 8.18% (5 year), 8.70% (since inception)
- Morningstar Analyst: Himanshu Srivastava
- Date of Analysis: February 2021
- Expense Ratio: 0.74% (regular plan), 0.24% (direct plan)
- Assets under management: Rs 16,805 crore (March 2021)
- Modified Duration: 2.08
- Interest Rate Sensitivity: Limited
- Fund Overview
Anil Bamboli places significant emphasis on safety and liquidity while constructing the portfolio. Hence, he relies on fundamental research for security selection. The portfolio bears out that the manager has typically invested in highly rated (often AAA) paper of strong and stable private sector companies and paper issued by public-sector undertakings. Further, his in depth understanding of companies has helped him identify securities offering attractive spreads.
Manager Anil Bamboli seeks to add value through security selection rather than taking duration bets as it is typically maintained within the fund's defined investment mandate. The investment approach relies on fundamental research. It entails combining qualitative aspects with quantitative analysis. The investment team prepares the coverage list with a strong focus on the company management and track record, financial strength of the promoter group, and corporate governance standards. Meetings with management are followed by rigorous quantitative analysis in which the focus is to get a measure of the company's creditworthiness. The team studies the company's cash flow and relevant ratios--leverage, coverage, and solvency. At this step, the team also draws on the expertise of their counterparts in the equity team.
The fund company uses a proprietary model in which qualitative and quantitative inputs are used to arrive at a credit score for each issuer. This in turn helps managers determine the exposure they can take to each issuer, thereby acting as a risk-management tool--for the individual portfolio and the fund company as a whole. Here the investment team lays more emphasis on risk control, thereby focusing on balancing safety, liquidity and return. We think the investment process is thorough and that the manager and team are at home with the process.
Nippon India Short Term Fund
- Star Rating: 5 stars
- Analyst Rating: Neutral
- Average Credit Quality: AAA
- Fund Manager: Vivek Sharma & Sushil Budhia
- Inception: December 2002
- Return: 8.04% (1 year), 7.81% (3 year), 7.50% (5 year), 7.99% (since inception)
- Morningstar Analyst: Nehal Meshram
- Date of Analysis: December 2020
- Expense Ratio: 1.08% (regular plan), 0.34% (direct plan)
- Assets under management: Rs 7,903 crore (March 2021)
- Modified Duration: 1.91
- Interest Rate Sensitivity: Limited
- Fund Overview
In line with the positioning of the fund as a short-term offering, the managers try to maintain the portfolio duration in the range of 1.0-3.0 years. They maintain a strategic allocation of 60%-65% that reflects Prashant Pimple's medium-term view, while the remaining 35%-40% of the portfolio is managed tactically to take advantage of any short-term movement in rates. On the tactical front, the managers take exposure up to 25% in government securities/state development loans based on short-term market movements and ensure the maturity of the papers are below 3.0 years.
Economic, credit, and liquidity analysis form the pillars of the investment process. The strategy is research-intensive and relies mainly on fundamental research. We believe the recent change in ownership of the fund house will result in better processes.
The call on duration is taken by studying the macro scenario. The investment team incorporates the views of key external economists and in-house economists on factors such as GDP growth, inflation, fiscal deficits, and trends in government borrowing, which are important for managing this fund. For credit analysis, the investment team focuses on the business, management, financial health, and promoter group. It also uses the analysis of sell-side research and credit rating agencies to form a view on companies' creditworthiness.
With Nippon’s vast experience in the international market, the management team has been working over the past two years and has further enhanced the process. It has taken incremental measures to ensure adherence to its investment mandate. The firm has predefined templates for the duration and credit risk that funds can take based on their mandate. These ranges become the boundaries within which a manager operates. Periodic reviews are done based on the quality of the credit to determine whether a change in position is required.
Kotak Bond Short Term Fund
- Star Rating: 4 stars
- Analyst Rating: Neutral (regular plan), Silver (direct plan)
- Average Credit Quality: AAA
- Fund Manager: Deepak Agrawal
- Inception: May 2002
- Return: 7.55% (1 year), 8.04% (3 year), 7.58% (5 year), 7.72% (since inception)
- Morningstar Analyst: Nehal Meshram
- Date of Analysis: December 2020
- Expense Ratio: 1.16 % (regular plan), 0.34% (direct plan)
- Assets under management: Rs 16,608 crore (March 2021)
- Modified Duration: 1.68
- Interest Rate Sensitivity: Medium
- Fund Overview
The fund stands out for its conservative approach. The manager tries to maintain portfolio duration between 1 and 3 years and has adhered strictly to the investment mandate. Deepak Agrawal invests in corporate bonds, government securities/state development loans, and money market instruments. The fund aims to keep 75%-80% of assets in AAA corporate bonds and invests in PSU and quality private names with strong parentage such as Bajaj Finance, Tata Capital, and Reliance Industries. Contrary to many of its short-term bond peers, it does not take lower credit bets.
The process is research-based with an emphasis on safety and liquidity. The fund is more focused towards taking small duration bets and invests primarily in high-quality credits. The manager seeks to identify duration bets through macroeconomic factors, by incorporating the views of internal and external economists.
Credit analysis is divided into banking, nonbanking financial companies, and manufacturing debt and further demarcated into three buckets based on the strength of the business, management, and corporate governance standards. Surveillance has shot up after the recent spate of downgrades in the market. The NBFC and housing finance sector, which was evaluated on a quarterly basis, is now tracked monthly. The team also keeps a check on the sponsor debt and evaluates asset liability profile monthly rather than quarterly. It also leverages the expertise of the equity team at Kotak Mutual Fund and Kotak Bank.
The qualitative assessment is then followed by rigorous quantitative analysis, wherein financial metrics such as leverage, coverage, and solvency ratios are considered. The manager follows a proprietary model to determine the exposure in each issuer. The robust risk-monitoring team ensures that the limits are being adhered to.
