Best Debt Funds to invest in 2018-2019
With the market booming is at all-time high, retail investors are concerned about the sustainability of the returns. A balance can be achieved through proper asset allocation and investing some part of your portfolio in debt funds that primarily invest in instruments such as bonds, commercial papers and the likes. In this blog we have listed best debt funds of different categories to choose from.
Note: Regular growth plan is taken for track record performance
Source: Morningstar; As on 23-Nov-2017
Liquid funds are debt funds that invest in very-short term instruments such as treasury bills, government securities and call money up to maturity of 91 days. These funds hold least amount of risk.
- Aditya Birla Sun Life Cash Plus:
The fund was launched in 2004 and has generate good returns against category average and benchmark. Ideal for cash management purpose the fund is a good substitute to saving account for short term churning. The fund manager, Sunaina Cunhaline and Kaustubh Gupta, who are managing the fund since June 2009, invests 100% of the corpus in cash and cash equivalents which is broken into instruments such as commercial paper, certificate of deposit and the likes. The short-term credit rating category – A1+ (equivalent of AAA long term category) accounts for 100% of the allocation. With objective to provide high liquidity and safety with reasonable returns through investments in debt, the fund manager has been able to keep average maturity of fairly diversified portfolio (130-140 securities) at around 0.11 years. The standard deviation which measures risk against performance record is low at 0.26 against category average of 0.34 thereby the fund as one of the safe bets to be used for cash management purpose.
- Tata Money Market Fund:
The fund was started in September 2004 and has a strong track record for generating considerable alpha over benchmark and category average. The fund has assets under management of around Rs 12,105 crore as of October 31, 2017 and is ably managed by Amit Somani since 2013. The fund manager invests 100% of the corpus in cash and cash equivalents which includes short-term commercial papers, treasury bills. 100% of the corpus is invested in instruments that are rated at A1+ short term rating which is equivalent of long term AAA category thereby indicating low risk. Owing to sizeable investments in short term instruments, the average maturity is couple of months at 0.11 months. The fund is fairly concentrated with 50-60 securities and has a low standard deviation 0.24 against category average of 0.34 there by indicating low risk. The fund, we believe, is ideal for money management purpose and should be ideally used in alteration to savings account deposit.
Ultra Short-Term Funds
Source: Morningstar; As on 23-Nov-2017
Note: Regular growth plan is taken for showing track record of performance for the funds
Ultra short-term funds invest in fixed-income instruments that are liquid in nature and generally have short maturity period. These funds help investors avoid interest rate risks and offer better returns than any money market instruments.
- Aditya Birla Sun Life Floating Rate fund – Long Term:
The fund, launched in March 2009, has generated considerable returns over the one-year, three-year and five-year period and has successfully beaten category average and benchmark. The fund maintains around 78% allocation to bonds with remainder in cash and cash equivalents. The fund has high allocation to AAA credit rated instruments that accounts for 72% of the portfolio. Good performance as highlighted in table above along with low volatility as seen from standard deviation of 0.84 against category average of 0.84 has helped the fund expand asset base to around Rs 7839 Crore by October 2017. The fund is well diversified with around 110-120 securities in portfolio with average maturity of 1.15 years. Lastly, the stable management under the leadership of Kaustubh Gupta since 2011 has provided with sustained performance.
- ICICI Prudential Flexible Income:
The fund has a track record of 15 years and it has successfully managed to beat its benchmark and category in each of the multi-trailing time period. The fund manager, Rahul Goswami, who took over in September 2012 has kept a high allocation to long-term AAA rating category at 79%. The debt-category fund invests around 80% of corpus in bonds and rest in cash and cash equivalents. The fund also invests in state development loan of sovereign rating. The portfolio is well diversified with around 130-140 securities having average maturity of less than a year. Good performance as highlighted in table above along with low volatility as seen from standard deviation of 0.68 against category average of 0.84 has helped the fund expand asset base to around Rs 23155 Crore by October 2017.
- SBI Treasury Advantage Fund:
With around 8 years of track record the fund has managed to generate alpha over its category and benchmark over multi-trailing time period. The performance of the fund has led it to garner assets of around Rs 4730 Crore as of October 31, 2017. Currently the fund is managed by Rajeev Radhakrishnan since 2013 and has high allocation to long-term AAA rated securities at 80%. The fund has two-third allocation to bonds (corporate and government) followed by cash and cash equivalents at one-third. Due to higher allocation to short-term debt instruments, the average maturity is less than a year. The portfolio is fairly concentrated with around 50-60 securities when compared to peers. The fund’s volatility at 0.58 against category average of 0.84 has helped the fund expand its asset base.
Short-Term Debt Funds
Source: Morningstar; As on 23-Nov-2017;
Category – Aditya Birla Sun Life Treasury Optimizer – Intermediate Bond
Category – Tata Short Term Bond Fund – Short Term Bond
As the name suggests short-term debt fund is suited for shorter duration typically less than 3 years. Such funds invest in debt instruments such as Certificate of deposit, corporate and/or government papers and are less impacted with changes in market interest rates. Such funds provide flexibility of exiting the investment when there is requirement at no exit load though tax implications may be there.
- Aditya Birla Sun Life Treasury Optimizer plan:
The fund was launched in 2008 and since then it has generated good performance which has helped it garner sizeable assets. While the fund has generated marginal alpha over category average over different time period, its asset base has increased to Rs 8,324 Crore as on October 2017. The fund invests around 89% in bonds followed by rest in cash and cash equivalents. The fund has highest exposure to AAA rated long-term debt at around 88% that shoots up the average maturity period to 3.1 years. The portfolio’s volatility at standard deviation of 2.49 is better than category average 3.08. Also, the Sharpe ratio at 2.24 is better than category average of 1.72 thereby indicating better downside capture for the fund. While Kaustubh Gupta ably managed the fund since launch there was a recent change at the helm whereby Maneesh Dangi took over the charge in April 2017. Overall, we believe the fund is good against FDs with maturity of less than three year as it offers low risk with stable returns.
- Tata Short Term Bond Fund:
With a track record of around 15 years the fund has generated alpha over category returns. The fund invests primarily in bonds with 93% allocation followed by remainder in cash and cash equivalents. The fund primarily invests in AAA rated fund only and is fairly diversified with 130-140 securities and average maturity of 2.6 years. With the presence of high rated securities the volatility is low at 1.22 against category average of 1.41 thereby making the fund a moderately safe investment for your portfolio. Murthy Nagaran is the fund manager for the fund and has taken over in April 2017.
Short Term Gilt
Note: Regular growth fund is used for the analysis to present the track record of the performance.
Source: Morningstar; As on 21-Nov-2017
Gilt funds are mutual funds that invest in government-backed securities of varying maturities. These funds include both long-term gilt funds and short-term gilt funds. While long-term gilt funds can have securities maturing in as long as 30 years, the short term funds typically invest in securities in short maturity period as well as long-term bonds with short term residual maturities.
- SBI Magnum Gilt Fund:
The fund, managed by Dinesh Ahuja since Jan 2011, provides an opportunity to invest in government backed securities which is otherwise not available to retail investors. The fund comprises of investments in government-backed securities and other bonds with AAA rating category accounting for 100% thereby indicating highest degree of safety. While bonds account for one-third of the total portfolio, the other instruments including CBLO or cash equivalents accounts for the remainder. The fund has generated considerable returns within its category over multi-trailing time period and has around Rs 589 crore of assets under management as of October 31, 2017. The fund’s volatility is low at 1.75 against category average of 1.99 indicating low risk of the fund. We believe that while might not have given abnormally high returns as equity backed funds but its sustained performance coupled with low risk surely makes the fund a must in your portfolio.
- IDFC Government Securities Fund – Short Term Plan:
With an objective of generating sustainable returns by investing in government backed securities the fund has returned reasonable return over multi-trailing time period having outperformed its category returns over these periods. The fund manager, Harshal Joshi who is managing the fund since May 2017, invests in government-backed securities and corporate bonds with investment grade rating accounting for 100% of the total portfolio. While bonds account for 55% of the investment the remainder is CBLO and cash equivalents. The total asset under management as of October 31, 2017 is Rs 102 crore. The fund has low volatility of 1.63 against category average of 1.99 indicating low risk. We believe while the fund might not give abnormally high returns when compared to market due to moderate beta but it is a good fund to invest in for sustainable returns with low risk. We believe this fund should ideally be a part of the overall portfolio as it helps reduce overall risk and also provides diversification.
Credit Opportunities Fund
Note: Regular growth fund is used for the analysis to present the track record of the performance; Morningstar category of Ultrashort Bond is used for category returns
Source: Morningstar; As on 23-Nov-2017
Credit Opportunities Funds are debt mutual funds that adopt accrual strategy with an aim to provide better returns. These funds invest in low credit rated funds which offers high returns. These funds can provide high returns but they have a default risk and their returns can be affected if there is a downgrade in ratings of the company whose bond they held.
- Franklin India Low Duration:
The fund, with a track record of 7 years, has been able to perform sustainably over multiple business cycles. Ably managed under the leadership of Santosh Kamath since 2014, the fund has continued with its objective to earn regular income through investments in debt securities. The fund has assets under management of Rs 5,238 crore as of October 2017. With around 91% allocation to bonds followed by remainder in cash and cash equivalents, the fund has achieved an average maturity of 1.65 years for its underlying securities. The portfolio is fairly diversified for the category with around 70-80 securities. While the fund has higher exposure to A rated long term debt, which is riskier than AAA or AA rated category, at 40% it has successfully mitigated the risk by some investments in sovereign rated, AAA rated instruments. This diversification has helped fund generate higher returns compared to its category average and benchmark over each of the time period while maintain low volatility at 0.70 against category average of 1.41.
Debt funds provide stability to the portfolio and they help in reducing the volatility of the overall portfolio. These best debt funds must form a part of every portfolio according to the risk profile of the investor.
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