It’s raining short term funds in the mutual fund industry. We are living in an environment wherein both policymakers and investors are uncertain about the direction of interest rates. In this scenario, the question that comes to an investor’s mind is on which part of the yield curve they should park their money. In a normal scenario, when interest rates are expected to move in an upward direction then the advice is always to park money in short term funds, while in the opposite scenario, the surplus money is parked in long term funds. However, when things are uncertain, then investors can look at dynamic bond funds and even take an exposure to short term funds.
We continue to stay positive on the shorter end of the curve on account of 2 reasons. The first is definitely the improving liquidity situation in the economy and the second factor can be attributed to the expectations on the rate cut front. As far as the liquidity is concerned, the numbers are definitely positive and within the comfort zone of the Central Bank. Borrowings under Liquidity Adjustment Facility (LAF) window was around INR 22,300 as of 26 July 2012. This improvement in liquidity will reduce the pressure on the shorter end of the curve.The current yield curve is currently flattish and we are of the view that with the easing of liquidity it will actually start steepening in the coming months.
The second factor that is contributing to the positive outlook on the short term category is the expectations on the rate cut front. The central bank after having aggressively increasing policy rates 13 times since March 2010, actually surprised the markets by cutting the repo rate by 50 bps in April 2012 as against the market expectation of 25 bps. Subbarao and team are currently fence sitters and watching what the government is doing to tame inflation. We don’t think that the government which has been a mute spectator since coming to power will come out with any great reforms in the coming months and hence the team at RBI will have to cut rates in a moderate manner, so that the growth momentum of the economy does not halt. In short, short term funds are here to gain and we advise investors to look at the best bets in this category and start taking an exposure in the same.
AIG short Term Fund:
An actively managed fund from the AIG stable which plays safe by not resorting to any form of credit risks has come up the ladder by its stupendous performance in a short period of time. It is recommended to conservative investors who can part with their surplus for a time period of 6 months to 1 year.
DWS Short Maturity Fund:
An aggressive fund which has been around since 2003 is known to take active calls depending on the fund manager’s views on interest rates. The consistent performance delivered by the fund over a long period of time give us the confidence in recommending it to investors who are willing to take risks and can stay invested for a period of 1 year.
Templeton India Short Term Income PLAN:
The veteran in the short term space with the largest corpus; the credit risks that this fund takes have made it the favorite of investors. We recommend this fund to all investors who want to get the extra alpha by taking little bit of risks and also has the patience to stay invested for 15 months.
UTI short Term Income Fund:
A consistent performer over the last 5 years which actually takes active calls as when opportunity arises is recommended to investors who are risk averse and can wait for a time horizon of 1 year. The tactical calls that the fund manager has been taking without compromising on the quality of papers has been the reason for recommending this fund to investors.
For more details on the short term recommended funds, please read Hot Picks to Park Your Cash.