Given the weak macroeconomic circumstances, with spiraling prices of oil and food items and fresh tensions at the Eurozone, the growth rate for the year 2012 has slowed down. In its effort to lower inflation, the Reserve Bank of India cut the repo rate by 50 bps in its annual monetary policy meeting on 17th April 2012. However, a sharp rise in the value of rupee is not supporting the growth of the Indian capital market. The sentiment of the market turned more negative, after credit rating agency S&P downgraded India to negative from neutral.
It is expected that in medium and long end, supply from PSU /Sovereign issuers to continue as
issuers take advantage of lower capital market borrowing
rates vis-a-vis bank loans. This is expected to keep rates elevated on the bond yield curve in the near to
medium term. Hence we remain positive at the short
end, which should react to improvement in liquidity and any rate action. (Source: DWS Investments)
The chart 1 shows the upward trend in the yield curve for 3 months certificate of deposits (CDs) and commercial papers (CPs) that are issued by banks and corporates respectively in the bond market.
Since September 2009, when the government and central bank pumped in stimulus money in the economy on account of the global financial crisis, the yields have gone up by almost three times.
In this scenario, investors who have surplus funds with them over a short-term time horizon can invest in fixed income mutual fund products - Fixed Maturity Plans (FMPs) and Ultra Short Term Funds and earn better post tax returns than savings account deposits which yields only 3-4%.
As FMPs come with a lock-in period (between 3 months, 12 months, 15 months), those who seek easy liquidity and have a 3-6 month horizon can consider Ultra Short Term Funds.
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Chart 1: Yield curve - 3 month instrument
source: Fundsupermart.com Compilations |
Features of Ultra Short Term Funds
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Fund Type: Open ended
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Fund Category: Debt
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Risk Rating: 1 – Lower Risk
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Minimum Amount: INR 5,000 – 10,000 (retail plan)
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Tax arbitrage: The dividend income from mutual funds is tax free; albeit the fund house pays a Dividend Distribution Tax (DDT) of 13.84% [in case of non-liquid, debt funds such as Ultra Short Term Funds] before doling out the dividend to the investors. Even with DDT, investors who pay income tax at 20% or more can opt for dividend option and take advantage of tax arbitrage. The difference in the NAV post dividend declaration will set off capital gains which would otherwise be taxed at your personal income slab as short-term capital gains.
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Redemption: T+1 business day. For example, if you submit the request before 3pm today, then you may get the redemption amount (direct credit/cheque) by the next day but if it gets registered after 3pm, you shall receive the money the day after.
Recommended Funds: as there are more than 40 Ultra Short Term Funds available in the market, We recommend Top 3 Funds
DWS Ultra Short Term Fund: This fund invests in money market instruments, corporate bond papers and fixed deposits. Around 95% of the portfolio is invested in the high credit quality papers (AAA/P+) and rest in AA/P1 papers.
Fund Factsheet (as at 30 April 2012)
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Yield-To-Maturity: 10.15%
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Average Maturity: 0.20 years
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AUM: 1958.86 crores
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Benchmark: CRISIL Liquid Fund Index
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Exit load: NIL
Why We Recommend: This fund has always been among the better performing ultra short term funds. It has outperformed its benchmark across 1, 3 and 5 year periods. The fund has generated CAGR return of 7.49% over 5 years as compared to 6.85% generated by the benchmark. Over the 3 year period, this fund has given 6.81% returns in comparison to 6.08% returns from its stated benchmark as at 30 Apr 2012. The salient feature of this fund is that there is no exit load on this fund. Hence, one can enter and exit the fund without any load.
Templeton India Ultra Short Bond Fund: This fund has 69.18% of the portfolio in A1+ rated instruments and it invests 91.33% of its total corpus into money market instruments. The remaining is invested in Cash and Current Assets.
Fund Factsheet (as at 30 April 2012)
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Yield-To-Maturity: 10.64%
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Average Maturity: 0.19 years
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AUM: 1737.85 crores
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Benchmark: CRISIL Liquid Fund Index
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Exit load: Nil
Why We Recommend: As at 30 April 2012, this fund has outperformed its benchmark across 6 months, 1 year and 3 year periods. Over the past 1 year, this fund has given 9.50% returns, while the benchmark has returned 8.59% and over a 3 year period, this fund has given CAGR returns of 7.01%, while the benchmark has given 6.08%.
As at 30 Apr 2012, the fund's expense ratio stood at 0.85%.
BNP Paribas Money Plus Fund: The fund aims to invest in floating rate debt instruments, fixed rate debt instruments, money market instruments and derivatives. As on 30 April, 2012, 2.39% of the portfolio is invested in corporate debt, 89.03% in money market instruments (CPs and CDs) and rest in CBLO/Repo instruments, Mutual Fund Units and Treasury Bills.
Fund Factsheet (as at 30 April 2012)
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Yield-To-Maturity: 10.42%
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Average Maturity: 0.33 years
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Benchmark: CRISIL Liquid Fund Index
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Exit load: Nil
Why We Recommend: The fund has always been among the top performing funds has outperformed its benchmark, Crisil Liquid Fund Index, across the period of 1, 3 and 5 year period. Over the past 1 year, this fund has given 9.24% returns as against the benchmark return of 8.59% and over a 3 year period, this fund has given CAGR returns of 7.04% as against the benchmark return of 6.07% and similarly for a period of 5 years the fund has given a return of 7.76% as against its benchmark, which returned 6.85%. As at 30 April the fund has a expense ratio of 1.49%.
Conclusion
As per the monthly factsheets, the Yield-To-Maturity (the rate of return anticipated on the fund if it is held until the date of maturity) of most of the Ultra Short Term Funds is currently at much higher levels than the 3-4% return from savings account. Also, since the portfolio of these funds is composed of money market instruments i.e. CDs and CPs and corporate bonds, the credit profile varies across AAA and AA rated for corporate papers, PR+, P1+, P1 rating for CDs and CPs which are well rated.
Hence, these products can be considered by retail investors as they not only offer good post tax returns and easy liquidity but also are less volatile than equity asset class in the intermediate period. Thus, Ultra Short Term Funds work as a good investment product for short-term horizon than the traditional savings account deposit.
Related Article: Answer to Intermediate Investing: Ultra Short Term Funds
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