FundsIndia Recommends: HDFC Short Term Debt

September 26, 2018 . Bhavana Acharya

  • A short-duration, low-risk debt fund


  • Delivers category-beating returns even with low-risk papers


  • Investors with a 2-year plus timeframe looking for FD-plus returns
  • Low-risk investors who prefer low-volatile returns

An ability to deliver returns higher than fixed deposits, maintenance of portfolio in short-term low-risk papers, and low chance of temporary losses, all make HDFC Short Term Debt a good fund.

The average 2-year rolling return since the fund’s inception in 2010 is 9.01%. That’s well above the average FD return of 8.0%. These average returns are also higher than the CRISIL Short-term Bond index’s 8.75%.

HDFC Short Term’s prudent credit and duration strategies besides judicious exposure to papers makes it a low risk play in the debt fund space. These characteristics of the fund stand out at a time when credit risks and concentrated exposure to papers have surfaced in the debt industry in the form of IL&FS.

Low risk, low volatility

HDFC Short Term Debt has multiple factors in its favour. One, the fund’s credit and duration risk profiles are low. By mandate, the fund seeks to invest in high-quality papers. Exposure to papers rated below AA+ forms less than 5% of the portfolio, and has remained below 10% since inception. Lower credit risk reduces the chances of downgrades or defaults. Short duration funds often take credit calls to improve portfolio yields and returns. Several peers hold 20% and over on an average in papers rated below AA+.

HDFC Short Term maintains a low average maturity of less than 2 years. In this way, it keeps the effect of interest rate movements to a minimum. The fund’s volatility is lower than even its benchmark index in timeframes of a year or more.

HDFC Short Term Portfolio

Two, the fund does not take excess concentration in individual papers. This factor gains importance at a time when a handful of funds have been hurt due to high exposure to papers in IL&FS and its group companies. For debt funds that were badly hurt by the IL&FS downgrade, exposure to the instruments were high. While this was a rare instance of a high quality paper being downgraded, the impact could have been minimised if exposure had been low. In this regard, HDFC Short Term Debt generally keeps exposure to individual issuers low. Where the fund does take higher total exposure to individual issuers across papers of different maturities, it is in PSU companies such as PFC or REC or in stable companies such as HDFC. To this extent, risk due to defaults stands reduced. 

Three, even with the low risk, HDFC Short Term is able to deliver above average returns. On a 2-year rolling return in the past 5 years, the fund has beaten the average return of short-duration funds all the time. The fund uses capital appreciation opportunities on its AAA portfolio to generate higher returns as well. For example, its average YTM in the past five years is 8.2% on an average maturity of 1.5 years. Its average 1-year returns in this period were 8.6%. That means post expenses, it has been able to generate returns more than its portfolio yield.

The fund’s returns are also higher than bank deposit rates. The average 2-year rolling return works out to 8.91%, above average 1-3 year deposit rates of 7.54% since 2013-14. The fund’s ability to beat the CRISIL Short Term index is also commendable. Debt funds typically find it hard to beat the CRISIL index since the index is a near-perfect blend of short-duration papers that is hard to replicate practically and it does not have to account for redemptions and expenses.

HDFC Short Term PerformanceFour, the fund is low volatile. Since its inception eight years ago, HDFC Short Term has delivered losses on a 1-month period just 2.4% of the time. The CRISIL Short-term index itself has generated losses twice as many times. The fund has never delivered a loss in a 6-month or longer period. HDFC Short-Term’s combination of above-average returns, low risk, and low volatility is unmatched by other short-duration funds barring Axis Banking & PSU Debt and UTI Banking &PSU Debt.


HDFC Short Term is for holding periods of 2 years or longer. This provides a cushion to absorb temporary losses due to changes in rate cycles, or during the few occasions of downgrades or defaults. A 3-year plus holding will help benefit from capital gains indexation. The fund can form part of the debt component of long-term portfolios for any investor.

The fund has a large AUM of Rs 9,441 crore and sports a below-average expense ratio. The fund’s long standing manager is Anil Bamboli, with Rakesh Vyas the second manager.

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.

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