Why IDFC MF and Kotak MF Short Term Funds are Safe Choices
Resolutely focused on growth, the RBI continued to maintain an accommodating policy. It has also kept the repo rate at 4% since May 2020. While the central bank has taken steps to normalize liquidity, a rate hike is not expected until 2022.
Given the uncertainty about the future course of interest rates, investors with a moderate risk appetite and with a horizon of up to 3 years may opt for short-term debt funds. Here, choose from those with a portfolio of high credit quality – sovereign debt and AAA rated securities – for maximum security. IDFC Bond Fund – Short Term Plan (IDFC STF) and Kotak Bond Short Term Fund (Kotak STF) are two such programs. They can be part of your core debt portfolio.
Short-term funds invest in debt and money market instruments such as corporate bonds, debentures, certificates of deposit (CDs), treasury bills (T-Bills) and government bonds, so the Macaulay term of the portfolio is 1 to 3 years. These funds derive their returns largely from interest earned on bonds / debt securities held (accrued interest). These funds are better placed than medium and longer duration funds to benefit from any future rate hikes.
Once interest rates start to rise, short-term funds can start investing in higher yielding debt securities as older debt securities mature. These funds are also relatively less subject to interest rate risk – through falling bond prices (capital loss) in a rising interest rate situation – compared to other categories of funds. longer duration.
Both IDFC STF and Kotak STF outperformed the short-term fund category over different investment horizons based on a Rolling Return Analysis (CAGR). Only funds that have existed for at least five years and a minimum asset under management of 300 crore have been taken into account. Over the past seven years, the two funds have generated an average one-year return of 7.9% versus 7.6% for the category. The 3 and 5 year average returns were 7.6% and 7.9% for the funds, compared to 7.2% and 7.4% respectively for the category (all returns are CAGR). Over the past seven years, the standard deviation (SD) for IDFC STF and Kotak STF has been 0.49% and 0.51%. The standard deviation for even funds ranges from 0.37 to 1.74 percent. The higher the SD, the higher the volatility of the return.
While there are other funds in the category that offer higher returns, the IDFC and Kotak funds stand out for their consistently high credit quality portfolios, largely comprising the highest rated sovereign and AAA debt securities. This provides the highest degree of security.
The highest rated debt securities represented 94% and 95% respectively of the portfolios of STF IDFC and STF Kotak in August 2021. This has also been true in the past. The two funds have consistently held over 90% of their assets in such debt securities since September and March 2019, respectively.
IDFC STF invests in debt instruments with an average portfolio maturity of around 2 years (currently 2.1 years). Kotak STF, on the other hand, invests in debt securities of different maturities in order to diversify risk. The fund thus has a broader average maturity of 1.4 to 3.9 years over the past five years (currently 3.5 years). A detailed breakdown shows that IDFC STF held 37% of its net assets in debt securities maturing in one year, 25% in 1-3 years and 32% beyond 3 years in August 2021. Kotak STF held 16 percent, 26 percent and 51 percent in the respective segments.
Since April 2021, both funds have increased their holdings of government securities (g-sec), which may benefit from relatively higher returns in the five-year g-sec segment. In August 2021, IDFC STF and Kotak STF respectively held 31% and 42% of these debt securities.