Ultrashort passive debt funds offer high yield, low risk for 3-6 months

Several fund houses, including ICICI Prudential Asset Management Company (AMC), Aditya Birla Sun Life AMC, Kotak Mahindra AMC and Bandhan AMC, have recently introduced ultra short-term debt index funds. These schemes track the CRISIL-IBX Financial Services 3–6 Months Debt Index. According to reports, the cut-off yield for 90-day treasury bills (T-bills) at Wednesday’s auction stood at 6.52 per cent, compared to 6.47 per cent for 364-day T-bills.

 

“Currently, investors are looking for stability, liquidity and reasonable returns amid fluctuating interest rates, inflationary pressures and global uncertainties. Short-duration debt instruments, particularly in the three–six-month segment, are attractive as they provide relatively higher yields while minimising interest-rate risk,” says Sirshendu Basu, head–products, Bandhan AMC.

 

“Continuous infusion of liquidity, expectations of further rate cuts, including a probable change in stance of the monetary policy, makes the shorter end of the yield curve attractive at present. These short-end index funds give a unique combination of roll-down strategy and thematic exposure to financial services to provide higher yield and anytime liquidity,” says Kaustubh Gupta, co-head–fixed income, Aditya Birla Sun Life AMC.

 

What these funds offer

  These passive debt funds replicate CRISIL’s index, comprising AAA-rated instruments maturing in 3–6 months. “Low expense, roll-down benefits which reduce volatility, and 100 per cent exposure to AAA-rated issuers make these funds attractive,” says Gupta.

 

“We expect the Reserve Bank of India (RBI) to add more liquidity and cut the repo rate by 25–50 basis points over the next six months. This will effectively steepen the yield curve and help the strategy generate superior returns,” says Abhishek Bisen, senior executive vice-president and fund manager–fixed income, Kotak Mutual Fund. 

 

Comparison with fixed deposits

  The year-end liquidity crunch driven by credit demand has pushed yields upward. “As mutual funds (MFs) are market-linked products, returns may be higher or lower than the portfolio yield-to-maturity (YTM). Bank fixed deposits are contractual return products,” says Joydeep Sen, corporate trainer (debt) and author.

 

“The 3–6-month segment exhibits steepness, creating an opportunity for additional yield compared to fixed deposits with similar tenures,” says Basu.

 

Risks to consider

  The index’s focus on high-quality bonds limits exposure to higher-yielding, lower-rated instruments. “Having to replicate the underlying index passively reduces space for active management to create alpha for investors in evolving market conditions,” says Gupta.

 

Sector concentration is another risk. “The fund primarily invests in the financial services sector, which may lead to concentration risk if sector-specific challenges arise. Also, there may be instances where certain securities are unavailable, which could impact tracking efficiency,” says Basu.

 

These schemes are not designed for long-term fixed-income allocation.

 

Who should invest? 

Their limited default and interest-rate risks make them suitable for conservative investors with short-term goals. “Any investor who needs to withdraw part of the portfolio at short notice should park that portion in liquid or ultra short-term funds,” says Sen.

 

Investors with a three- to six-month horizon may go for these funds. “If one is comfortable with the volatility of four–six months’ duration and has a three-month investment horizon, one can look to invest or add. Those with shorter horizons like 15–30 days may avoid,” says Bisen.

 

Finally, investors should also keep an eye on tracking error and fund expenses.