- An ultra short-term debt fund
- Delivers above-average returns, with almost nil credit risk
- Risk-averse investors and those with a short-term horizon of less than 2 years
Indications on the interest rate front point to rates being in the flat to rising zone. In such a scenario, debt funds with shorter maturities can deliver well over the next couple of years as their portfolios adjust quicker to higher rates. In this context, UTI Treasury Advantage is a good option.
The fund and its suitability
UTI Treasury Advantage is an ultra short-term debt fund. Typically, ultra short-term funds suit those looking to temporarily park funds for a few months. However, at this point, investors with longer horizons of 1 or 2 years can also consider investing in the fund given the current rate scenario.
Several banks have already hiked their deposit and lending rates in the past few months. If deposit rates go up, bank CD (certificate of deposit) rates follow suit. CDs also pay out higher coupon compared to bank FDs. Similarly, higher bank lending rates translate into higher yields in corporate papers across maturities as well, in which debt funds invest. Short-term yields have been rising in anticipation of either no further rate cuts or even a potential rate hike by the Reserve Bank on inflation concerns. 1-month CP (commercial paper) yields are current at 8.1% against the 7.35% last March and 7.08% as recent as October 2017. Similarly, 1-year CD yields rose to 7.4% now against the 6.63% they were last March.
UTI Treasury Advantage’s average maturity is just under 6 months as per its February 2018 portfolio. This gives it the room to increase portfolio yields quicker, in line with the market. In a rising rate environment, this bodes well for generating higher returns in the next year or two. The fund’s portfolio yields have been slowly climbing in the past few months to 7.64% in January 2018 (latest available data).
Performance and portfolio
UTI Treasury Advantage uses a mix of CPs, CDs, treasury bills, and corporate bonds with short residual maturities depending on the rate scenario. In late 2016 and part of 2017, for example, with very short-term rates sliding, the fund increased allocations to higher yielding corporate bonds. In the past few months, CP/CD/T-bill exposure has risen gradually to 37-40% of the portfolio from less than 30% in the early part of 2017.
The fund also sticks to higher-rated papers, unlike many peers. The share of papers rated below AA+, which signifies higher credit risk, is 10.7% per its February 2018 portfolio. Even here, the fund has no papers in the A-rated set; the bulk of its limited credit exposure is in AA rated papers. On an average, the ultra short-term category has a credit exposure of 17.8%. UTI Treasury Advantage has also been gradually bringing down share of AA and below papers; it was relatively higher at 18-19% of the portfolio in early 2017. Given the steeper rise in AAA yields compared to AA and A papers, it is possible to make higher yields without going down the credit curve.
UTI Treasury Advantage has maintained returns above the category average. Rolling its 1-year returns for 5 years has it above category average all the time. Its average return in this period was 8.9% against the category’s 8.6%. On the same basis, the fund beats its benchmark CRISIL Liquid fund index which returned an average 8.21%. Given that the fund invests in longer maturity papers than liquid funds, this is not surprising. However, UTI Treasury Advantage even delivered on par with the much tougher CRISIL Short-term Bond index’s 8.91% average 1-year return.
The fund also scores on low volatility and restricting downsides. It has never delivered a loss even in a 1-month period when rolling 1-month returns in 5 or even 10 years. More than half the ultra-short term category delivered losses on a 1-month basis. When rolling a longer 1-year return for 5 years, the minimum return UTI Treasury Advantage generated was 4.9%, on par with the category. Its low duration and high share of money market instruments will also limit volatility should the interest rate scenario become more uncertain.
Sudhir Agarwal is the fund’s manager. The fund is unlikely to undergo a change in fundamentals under the new categorisation given that the AMC does not have several funds that follow a similar maturity profile and strategy.
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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