RBI’s hawkish monetary stance has been with the sole aim of taming the beast called “inflation”. Though policy rates have been increased 13 times since March 2010, inflation stubbornly remained in the 9.5%-10% range in the last 2 years; a clear indication that monetary measures alone are insufficient.
We, at Fundsupermart.com, have always held the view that inflation is a culmination of domestic and global factors. This implies the need for government intervention to bring the numbers into the RBI’s comfort zone. Unfortunately, lack of initiative on part of the government has only aggravated the issue. The central bank has decided to play along and throw the ball back into the government’s court by adopting a wait-and-watch stance. This would best explain the status quo maintained by the RBI at the last mid-quarter review held in June.
We are of the view that the UPA government, which has not done much in terms of reforms, will continue with its inactive stance for the next few months. On the other hand, the inflation numbers for May 2012, 7.55% (WPI) and 10.36% (CPI), have put the RBI in a tight spot. In this uncertain scenario, we strongly recommend investors with a 1-year horizon to park their money in short-term funds. They were the best performers in 2011 and still have steam left in them. After a detailed look at the options in this category, we have come out with the four best funds that investors must consider parking their surplus cash in.
AIG Short Term Fund
Though a relatively new fund, there is no arguing with the numbers. Its impressive performance has resulted in the corpus rising from a meager INR 42 crore in January 2011 to INR 292 crore by May 2012. Managed by Vikrant Mehta, most of the fund’s assets are concentrated in Certificates of Deposit (CDs) with the rest in corporate debt and cash. Mehta, unlike some of his peers, does not believe in compromising on the credit quality of his portfolio to give investors the additional alpha. He actively manages this fund as is evident from the average maturity that the fund has been following over the last two years. During 2010, when the RBI started increasing policy rates to control inflation, the fund manager maintained an average maturity of 398 days. The next year, when the central bank was in a rate hike spree, Mehta aggressively reduced the average maturity of the portfolio to take advantage of the higher yields offered by money market instruments. The average maturity reduced from 529 days in December 2010 to 58 days in January 2011 and remained in the range of 43 days to 235 days during the entire year.
Though one of the few funds in its category to have no exit load, this easy exit option should not be misused. Investors should stay invested for a period of 6 -12 months to give the fund manager ample time to play out the interest rate and duration game, which will in turn yield the desired outcome. An ideal fund for conservative investors who want to park their surplus cash in a fund that is able to outperform its peers without taking any risky bets
DWS Short Maturity Fund
From the Deutsche stable, this one has been around a while. Launched in 2003, this fund has been able to beat its benchmark over a period of 5 years. Its AUM rose from INR 447 crore in January 2011 to INR 544 crore in May 2012.
The average maturity of this fund remained in the range of 10-11 months since March 2010, when the RBI first started hiking policy rates. However, in the current year, the average maturity has increased to 15 months. This could be attributed to the view of the fund house that the possibility of hiking rates is minimal and there is going to be a downward trend in the coming months. A look at the portfolio over the last 2 years shows that this fund has more than 50% into CDs and Commercial Paper (CP) and the rest in corporate debt. In the past, there has been a very small exposure to Pass Through Certificates (PTCs), but the year 2012 has seen no allocation to this instrument. This could be attributed to the non-availability of PTCs in the market as well as no pricing premium for this instrument. The fund’s assets are normally concentrated in good quality papers and hence there is no credit risk. However, this fund is actively managed as can be seen from the duration calls that are taken in line with the interest rate views and also the active management done in corporate bonds and money market instruments.
Aggressive investors with a time horizon of up to 12 months will feel right at home here. We are confident that Deutsche’s fixed income team will be able to continue to deliver consistent performance by actively managing this fund.
Templeton India Short term Income Plan
This one has featured in our recommended funds list for over a year. Launched in 2002, it is the largest in this category with a corpus of INR 5228 crore as of May 2012 and a consistent performer over a period of 3-5 years. This fund is known to take major exposure to corporate debt and PTCs and since January 2011 has maintained an average exposure of 65% to such instruments. However, during this period, the concentration of PTCs in the portfolio has dropped from 36% in January 2011 to almost 10% in May 2012. This is the first time in 2 years that the exposure to this instrument has dropped to such a low level. The fund also invests in CDs and CPs. As far as the credit quality of the portfolio is concerned, the fund manager on an average keeps more than 50% of the assets in AAA, AA+ ,AA,P1+ and A1+ papers while the rest is distributed between below AA papers. We believe that this minimal credit risk that the fund undertakes gives the extra punch to the portfolio. The average maturity of the portfolio is normally in the range of 1 year.
We recommend this fund to those who have an appetite for risk and can stay invested for a time horizon of 9-15 months. The expertise that Templeton’s fund management team has shown in managing funds, by taking a little bit of credit risk, gives us the confidence in making this recommendation.
However, investors should note that this fund has an exit load up to nine months and has one of the highest expense ratios in the short-term category. Having said that, none of this has deterred the fund from delivering a superb performance not only when there was clarity on the fixed income side but also during uncertain phases.
UTI Short Term Income Fund
Having been around for 9 years, it has made a mark as being a consistent performer over the last 5 years. The impressive performance delivered by the fund in the last 1 year was an eye opener. When the RBI was in a hawkish mode and fund houses mostly maintained an average maturity of 1 year in their short-term funds, this one continued with 2 years. Despite this, the fund actually was able to outperform some of its peers which aggressively reduced their average maturity in line with RBI’s stance. The active management of the fund, as and when opportunity arises, could be the reason for this outperformance. A perusal of the portfolio since January 2011 shows that it has more than 60% concentrated into corporate debt and the rest is allocated between CDs and CPs with a very small exposure into PSU bonds. This fund also does not take any credit risks and is invested in the best quality papers.
In the recent past, there has been huge volatility in its corpus which has actually reduced from INR 1146 crore as of December 2010 to INR 142 crore as of June 2011 and stands at INR 417 crore as of March 2012. This could be the reason for the revision in the exit load of this fund to 0.75% upto 365 days. There has been a change of guard in fund management in February 2012 and Amandeep Chopra, an old hand in UTI and a seasoned player in fixed income, has taken over the fund.
We are of the view that Chopra with his vast experience in the bond market will be able to carry on the good work started by his predecessor. We advise this fund to all our conservative investors who are risk averse but have the patience to wait for at least a year.
We at fundsupermart.com advise investors to look at any of our recommended short-term funds and park their surplus depending on the risk appetite and time horizon. We believe that since we are in a situation where inflation continues to be a concern for the RBI and there is a lot of uncertainty on the macro front, the RBI will not be in a hurry to soften its policy stance. In this scenario, investors should consider allocating 10-15% of their portfolio in any of these recommended funds and reap the benefits after a year.