- Ultra short-term fund
- Invests in high-quality low duration papers
- Consistent, above-average returns
- Limited exposure to low-rated credit
- Investors with a short-term horizon of 6 months to a year
- Investors who want to leave some money as emergency corpus
Ultra short-term funds are useful vehicles to park money you need a few months down the line, to add to your emergency corpus, or to set up systematic withdrawals post retirement. In this category, Birla Sun Life Floating Rate Fund – Long Term Plan (Birla SL FRF – LTP) is a good choice.
The fund has returned better than most peers over the years and across different timeframes. It delivers this steady outperformance without resorting to taking credit calls and investing in high-yielding, low-rated papers. It comfortably beats short-term fixed deposit rates.
Performance and suitability
Since its inception in March 2009, the fund has returned 8.91%, against the CRISIL Liquid index’s 7.48% as well as the CRISIL Short Term Bond index’s 8.13%. The period since 2009 has seen a few rate cycles and is a good judge of a fund’s ability to perform. Birla SL FRF – LTP’s average rolling 1-year return over the past five years amounts to 9.49%, well above the category’s average of 8.91%. Rolling shorter periods of 6 months and even 3 months for the same period has the fund beating the category nearly all the time. Even at its worst in the past five years, the fund’s 1-year return of 8.23% was better than other funds’ worst performance. This least return wasn’t even during 2013, a very turbulent period for debt funds.
The fund remains in the top quartile in its category in 1-year and 3-year periods. In the shorter 6-month period, the fund is still above average. This is commendable, given that top performers currently hold a good portion of their portfolio in high-coupon high-risk papers while Birla SL FRF – LTP does not.
Portfolio and strategy
On an average, higher risk papers (those rated below AAA-) have made up 17.5% of the portfolio in the past year. That’s much below the 22% average for the category. Funds that hold the highest 1-year return have about 70% of their portfolio in high-risk papers.
Birla SL FRF – LTP invests mostly in commercial papers, bank CDs, and short-term corporate bonds and debentures. The fund’s portfolio yield tends to be lower than the average for its category, even discounting the high-risk funds. However, the fund tries to deliver higher returns by using capital appreciation opportunities on its AAA-rated papers, of which it has a larger share than most other ultra short-term funds. For this reason, the fund also has longer average maturities than peers. It has also used tactical duration calls sometimes to drive returns; the fund held, for example, a quarter to a third of its portfolio in short-term gilts in 2016. That the fund uses bond rallies to boost returns is apparent from the consistently higher returns it delivers even as its portfolio yields hold below average.
On the flip side, the higher share of AAA papers results in slightly more volatility as longer-term papers are more volatile and because they are subject to market fluctuations, unlike commercial papers. On a rolling 1-month return daily over the past five years, the fund has delivered losses on 6 occasions while there are ultra short-term funds that haven’t delivered losses at all. The fund hasn’t delivered losses in 6-month or even 3-month periods, however.
Birla SL FRF – LTP has comfortably beaten short-term fixed deposit rates as well, since its inception. It fits any investor looking to invest money for 6 months to a year, and who want returns better than the interest offered by bank deposits of a similar timeframe. The fund is managed by Kaustubh Gupta and has an AUM of Rs 7,390 crore.
FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis for investment decisions. To know how to read our weekly fund reviews, please click here.