HDFC Short Term Opportunities Fund: Higher returns at lower risk, volatility

Launched in June 2010, HDFC Short Term Opportunities Fund is an open-ended short-term income fund. It has been ranked CRISIL Fund Rank 2 (good performance) in the short- term income fund category according to the CRISIL Mutual Fund Ranking for the quarter ended September 2013. The fund was within the Top 30 percentile (Fund Rank 1 or Fund Rank 2) of its peer group since its inclusion in the CRISIL Mutual Fund Ranking in the short-term income category. It is managed by Anil Bamboli.

In the past year, the fund’s assets under management (AUM) rose from Rs 212 crore for the quarter ended September 2012 to Rs 2,389 crore for the quarter ended September 2013. During the period, the category’s AUM increased 78 per cent.

Objective
The scheme’s objective is to generate regular income through investments in debt/money market instruments and government securities with maturities not exceeding 36 months.

According to its scheme information document (SID), the fund intends to invest in debt securities (including securitised debt) with high credit quality to minimise liquidity and credit risk. Also, the fund intends to limit the average maturity/modified duration of portfolio to less than 36 months.

If redeemed before three months of investment, investors have to pay a 0.50 per cent exit load. There is no load for investments redeemed after three months of investments. The fund has an expense ratio of 0.33 per cent for the regular option and 0.23 per cent for the direct investment option.

Investors can consider short-term income funds to take advantage of high-interest rates in the shorter tenure papers.

Risk/return attributes
The fund has outperformed its benchmark (CRISIL Short Term Bond Fund Index or CRISIL STBEX) and the category across various time frames as on December 31, 2013.

Of its 14 quarters of existence, the fund has outperformed its benchmark in 11 and the category in eight quarters as on December 31, 2013.

The fund is less volatile compared to its category due to its conservative approach. Annualised volatility for the year ended December 2013 is 2.66 per cent whereas the category average is 2.92 per cent. This has resulted in higher risk-adjusted returns (represented by Sharpe ratio) of 1.41 for the fund versus 1.21 by the category.

The fund had a yield to maturity of 9.74 per cent as of November 2013. The average maturity of the portfolio is 1.33 years.

Portfolio analysis
The fund manager has changed the asset allocation and average maturity of portfolio (sensitivity to interest rate risk) strategically. Between its inception and until August 2012, when short-term rates were high, the fund was running on an average 44-day maturity portfolio of certificates of deposit (CDs) and commercial paper (CP) only. The fund had higher allocation to CDs when their yields started rising. Between December 2010 and August 2012, the fund maintained an average 89 per cent exposure to CDs and CPs to take advantage of high short-term interest rates. During this period, the three-month CD rates had gone up to levels as high as 11.43 per cent.

From September 2012 to November 2013, the fund reduced its average exposure to CD and CP to 13 per cent. During the same period, the fund maintained an average exposure of 80 per cent to NCDs and bonds. Also, average maturity of the portfolio was increased to 1.47 years when short term-interest rates were expected to fall. However, as stated in the SID, the fund has never increased its average maturity higher than 36 months. The fund has not had any exposure to government securities in its entire tenure.

Over the past three years, an average 84 per cent of its debt portfolio has been invested in the highest rated papers. The fund has never invested in securities with rating below an AA category.    

CRISIL Research