High on quality, performance

Continued volatility in equity markets and rising interest rates has resulted in the emergence of ultra-short-term debt funds as a favourable investment choice.

Ultra-short-term debt funds invest in short-term corporate debt papers, certificates of deposit (CDs), money market instruments and government securities. They are suitable for investors with investment horizons ranging from three months to one year. Compared to income and short-term income funds, these funds maintain portfolios that are more liquid and less interest rate sensitive. Ultra-short funds delivered an annualised return of 8.7 per cent over the last six months ended August 12.

SBI Short Horizon Debt Fund - Ultra-short-term Fund is among the top performing funds in the ultra-short-term debt funds category, according to the Crisil Mutual Fund Ranking for the quarter ended June. The fund has consistently featured in the top 30 percentile in its category for the last five quarters. The average assets under fund management (AUM) for the quarter ended June were of Rs 7,765 crore. Rajeev Radhakrishnan, head (fixed income) at SBI Mutual Fund, has been managing the fund since July 2008.

INVESTMENT OBJECTIVE
The fund’s investment objective is to generate regular income with high degree of liquidity. The fund will invest in a portfolio comprising predominantly of money market instruments with maturity/residual maturity up to one year and debt instruments, which are rated not below investment grade by a credit rating agency. The fund has outperformed the category and its benchmark (Crisil LiquiFEX) over different time horizons.

PORTFOLIO ANALYSIS
Apart from performance, an investor should look at a fund’s portfolio attributes. Parameters such as the fund’s asset quality, concentration and liquidity should also be analysed.

Over the last one year, 87 per cent of the portfolio has been invested in the highest rated papers (AAA/P1+ and equivalent), while close to 13 per cent was invested in fixed deposits and cash equivalents. Thus, the fund has maintained high asset quality in its portfolio.

Over the last one year, the fund maintained an exposure of 66 per cent towards CDs, higher than its peers which had an average exposure of 59 per cent. The exposure to CDs significantly contributed to the outperformance by the fund. The one-year CD rates increased from 7.4 per cent to 9.8 per cent over the past year.

Low average exposure (0.17 per cent) over the year to debentures and bonds helped the fund limit the downside in a rising interest rate scenario. In comparison, the peer group had an average exposure of 7.5 per cent to debentures and bonds over the past year. Higher exposures to securities with a longer tenure increase the portfolio’s interest rate risk in a rising yields environment.

Concentration is a risk to fund portfolios, wherein funds may be adversely affected by concentrated portfolios in the event of a downturn in a particular company. Crisil assesses concentration at the company level in terms of issuer limits for debt funds. SBI Short Horizon Debt Fund - Ultra Short Term Fund maintained a diversified portfolio at the issuer level.

The fund’s average maturity varied from 22 days to 84 days over the last one-year. Compared to this, its peers’ maturity ranged from 50 days to 101 days. Low average maturity reduces the fund’s interest rate risk. The fund maintained lower interest rate risk compared to peers.

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