If you are looking to play the opportunities in the debt market with at least a 1-2 year investment perspective, you can consider investments in Templeton India Short Term Income Plan.
This fund, which seeks to tap the opportunities in the corporate debt segment has, over years, proved its mettle in navigating tough markets and generating returns superior to traditional options such as fixed deposits, on a post-tax basis. The fund delivered returns of 9% compounded annually over the last 5 years, comfortably beating benchmark Crisil Short Term Bond Fund Index’ return of 7.4%.
Suitability and Strategy
Templeton India Short Term Income Plan is a good fund to tide over an uncertain interest rate environment, given its relatively low average maturity profile. But that does not make it a low risk fund as it has exposure to slightly lower rated corporate bonds, albeit investment grade. That means, while the fund is low on interest rate risk, it does carry credit risk.
The fund is therefore suitable only if you have some risk appetite. Investment at this point, if you wish to exit from the fund in the next 1-1.5 years, will provide you with double indexation benefit. That is likely to ensure that your tax is either very low or nil.
Templeton India Short Term Income Plan has beat its benchmark 100% of the times on a rolling one-year return basis for the past 3 years. While it did not generate negative returns (1-year return) on any of these occasions, the least 1-year return generated by it was between March 2010 and March 2011 – at 5.5%.
The maximum 1-year return during this period was a good 11.9%. Interestingly enough, its 1-year rolling return, taken on any date through 2013, has mostly been in the 8-11% range, the poor debt market conditions notwithstanding (in the second half of 2013).
That said, we analyzed how the fund performed on a monthly rolling-return basis to know whether the fund managed to tide over short-term volatilities such as the one in mid-2013. We observed that the fund’s rolling return did go negative, in the month of July 2013, when the debt market witnessed turmoil.
However, the worst fall though was -1.65% (for 1-month ending July 24, 2013). It is noteworthy that this is still superior to the 2-4% fall that many income/gilt funds with longer duration witnessed.
To summarize, while the fund is not totally immune to rate risks, with a low average maturity, it has managed volatility well.
Templeton India Short Term Income Plan has over 80% of its assets in corporate bonds, a small exposure to public sector bonds and the rest in money market instruments. Its corporate bond holdings mostly come with an AA credit rating. The average maturity of the portfolio was 1.78 years as of February and has seen a steady decline from about 2.6 years in March 2013, to keep the portfolio risk low in line with rising interest rates.
The fund has one of the most diversified debt portfolios with 70-80 instruments. Bonds from NBFCs in the Cholamandalam or Sundaram BNP Paribas Group, besides bonds of many of the unlisted arms of the Tata group and quite a few instruments from the Mahindra group find a place in the portfolio.
We think given the slightly lower rating of the instruments, the diversification, albeit appearing to be one too many, may be required to soften any impact in the event of trouble with any instrument.
We believe investors can gain adequately with short-to medium-term instruments for the simple reason that short-term rates are, at present, higher than long-dated ones.
Any decline in yields will be more beneficial at the short end. Even if a rate cut does not happen, funds such as Templeton India Short Term Income Plan are best placed to gain from the high interest accruals coming from corporate bonds. As of February, the yield to maturity of this fund was 11.13%.
The fund is managed by Umesh Sharma and Sachin Padwal-Desai. The fund will have an exit load if redeemed within 1 year.