Short-term Debt: Good Yields At Minimal Risk

Updated: Oct 20 2002, 05:30am hrs
Have you just received a large lumpsum and are deciding where to invest it And in the interim you have ruled out the savings bank deposit. After all what can one do with a measly four per cent Short- term debt funds may just be the answer to your disillusionment. They offer good yields, but at minimal risk.

Those investors who dont wish to lock in cash for a long duration wont find a better option than this. This offering doesnt have a particularly lengthy track record. From what I have seen, I feel that extended cash funds are of a superior income-earning option to a cash fund for investors with an investible surplus for three-six months.

Basically, a short-term debt fund falls between a medium-term debt fund and a cash fund.

This young offering, with a small allocation to gilts, higher allocation to medium-tenure corporate bonds and lower cash holding than a cash fund, is expected to deliver 0.5-0.6 per cent higher returns and with greater stability.

Earlier, investors with a short investment horizon of one-three months had just two options: a cash fund or a debt fund. If one opted for a cash fund one had to make peace with the fact that returns will be lower, as cash funds maintain a short maturity and a low marked-to-market portfolio to generate steady returns.

Alternatively, invest in the more volatile, longer-maturity medium-term debt funds. In India, Standard Chartered AMC was the first to think of a short-term debt offering, with an investment horizon spreading from one month to six months.

Soon, other AMCs followed suit, much to the joy of risk-averse investors. Currently, there are 20 such schemes floating around allowing investors to take what suits their palate.

But dear investor, please remember bond funds come with attendant risks that may catch the uninitiated on the wrong foot. These dangers include interest risk, inflation risk, credit risk and liquidity risk. When rates rise, bond prices fall.

The longer the maturity and the lower the coupon rate the greater the vulnerability. As for inflation, it erodes the value of fixed returns.

However, parking cash in high-quality securities can minimise credit and liquidity risks. In a declining interest rate regime short-term debt funds have had a dream run so far. Their performance is surely like to send others (read: cash funds) into a sulky mood.

The year-to-date return of 6.96 per cent turned in by short-term bond funds is a lot better than the 5.54 per cent return clocked by cash funds. The categorys one-month return during volatile May was 0.61 per cent, a lot healthier than an average bond funds loss of 0.31 per cent. As for medium-term debt funds, they registered a 3.21 per cent return for the quarter-ended March 31, 2002.

This category witnessed a 50 per cent decline in the quarter-ended June 30, 2002, whereas the difference in the case of short-term debt funds was only 0.3 per cent, amply proving their lower volatility vis--vis medium-term debt funds.

However, for the quarter ended September 30, 2002, the short-term debt fund gained 2.3 per cent and the medium-term bond fund was up 3.32 per cent. My picks among the short-term bond funds include:

Grindlays Super Saver Income Fund Short Term: Launched in December 2000, this is the oldest fund in its category. Its recurring expenses are the lowest in the category and also lower than half the cash funds as well.

The fund has turned in a return of 8.71 per cent since launch and its annualised one-month rolling return for the past 90 days stands at 9.45 per cent.

Prudential ICICI Short-Term Plan: Just a year old and this fund has emerged as the largest fund in its category. Its performance till date may send a lot of its rivals into counselling who were born around the same time. The funds annualised one-month rolling return for the past 90 days stands at 9.64 per cent.

Value Research