Yes Mutual Fund, a newbie in the Mutual Fund industry has launched yet another debt scheme, Yes Ultra Short-Term Fund (YUSTF), to increase its product offering for its growth in the competitive industry. YUSTF is an open-ended debt scheme investing in debt and money market instruments such that the Macaulay duration of the portfolio is between 3-6 months.
What is the Macaulay duration?
The Macaulay Duration is the weighted average term-to-maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price.
The Macaulay duration calculates the weighted average time before a bondholder would receive the bond’s cash flows. It is essentially an average of the duration of bonds within the portfolio, accounting for what percentage of the total portfolio each bond represents.
It is defined as the average time taken for an investor to receive all the cash flows (periodic interest as well as principal repayments) of a bond, weighted by the present value of each of the cash flows.
Mathematically, the Macaulay duration of a zero-coupon bond would be equal to the bond’s maturity Macaulay duration and can be calculated as follows:
t = respective time period
c = periodic coupon payment
y = periodic yield
n = total number of periods
m= maturity value
Current Bond Price = Present value of cash flows
Compared to a liquid fund an ultra-short-term fund invests in higher maturity debt papers and money market instruments.
Note that the bond prices are inversely related to the interest rates. Hence if a bond that has a longer maturity, is extremely price sensitive to changes in the interest rate as compared to bonds having a short duration. An ultra-short-term fund help investor reduce this interest rate risk and offer better returns than most money market instruments.
As per the mandate, YUSTF will allocate all its assets in money market instruments that include Commercial Paper, Certificate of Deposit, short term Deposit, convertible debentures, non-convertible debentures, Treasury Bills, short-term debt instruments, securitise debt, reverse repos in Government Securities etc. issued by various corporate, government – State and Central, Public Sector Undertakings (PSUs), etc. within the prescribed limits along with debt securities.
From the risk-return standpoint, YUSTF is a relatively moderately low risk-return. If you are planning to invest for your short-term goals (buying a vehicle, etc.), where you will require money within 3 to 6 months, then consider ultra short-term fund. The ideal time horizon to park money in an ultra-short-term fund is 3 to 6 months.
Table 1: NFO Details
|Type||An open-ended debt scheme||Category||Ultra-Short Duration Fund|
To generate reasonable income with low volatility through investment in a portfolio comprising of debt & money market instruments.
However, there can be no assurance that the investment objective of the Scheme will be achieved. The Scheme does not guarantee/indicate any returns.
|Min. Investment||Rs 1,000 and in multiples of Re 1 thereafter||Face Value||Rs 10 per unit|
|Entry Load||Not Applicable||Exit Load||Nil|
|Fund Manager||Mr Piyush Baranwal||Benchmark Index||CRISIL Ultra Short Term Debt Index|
|Issue Opens:||May 24, 2019||Issue Closes:||June 06, 2019|
(Source: Scheme Information Document)
How will Yes Ultra Short-Term Fund allocate its assets?
Table 2: YUSTF’s Asset Allocation
(% of Total Assets)
|Minimum||Maximum||(Low/ Medium/ High)|
|Money market instruments* (including CBLO/Tri party repo & Repo) & Debt Securities (including securitized debt)#$||0||100||Low to Medium|
* Includes commercial papers, commercial bills, treasury bills, Government securities having an unexpired maturity up to one year, call or notice money, certificate of deposit, usance bills and any other like instruments as specified by the Reserve Bank of India from time to time.
$ The Macaulay duration of the portfolio of the Scheme would be between 3 to 6 months.
# Debt Securities includes securitized debts and liquid schemes launched by SEBI registered Mutual Fund or schemes that invest predominantly in money market instruments/ securities.
Securitized debt cumulative allocation not to exceed 50% of the net assets of the Scheme.
The Scheme may undertake (i) repo / reverse repo transactions in Corporate Debt Securities; (ii) Credit Default Swaps, (iii) Short Selling and such other transactions in accordance with guidelines issued by RBI and SEBI from time to time.
Investment in Derivatives – The Scheme may invest up to 50% of its net assets in Derivatives. The Scheme may invest in derivatives based on the opportunities available subject to the guidelines provided by SEBI from time to time and in line with the overall investment objective of the Scheme.
The Scheme may invest in derivative instruments like Futures, Options, Interest Rate Swaps, Forward Rate Agreements, and such other derivative instruments as may be permitted by SEBI from time to time.
Derivative investments may be undertaken to hedge the portfolio, rebalance the same or to undertake any other strategy as permitted under SEBI (MF) Regulations from time to time. Hedging could be perfect or imperfect.
(Source: Scheme Information Document)
What will be the Investment Strategy?
The Yes Ultra Short-Term Fund aims to generate reasonable returns with low volatility from a portfolio of money market and debt securities. The fund gives importance to reducing credit risk and achieving portfolio diversification. The fund intends to maintain the Macaulay duration between 3 months and 6 months.
The fund management team will take an active view of the interest rate movement by keeping a close watch on various parameters of the Indian economy, as well as developments in global markets.
The fund manager with his team will, as a mitigation and risk control procedure, carry out rigorous credit evaluation of the issuer company proposed to be invested in. The credit evaluation process for an issuer includes
- Sector analysis
- The operating environment
- Business model
- Corporate governance practices
- Past track record
- Financial health
Who will manage the Yes Ultra Short-Term Fund?
YES Ultra Short-Term Fund will be managed by Mr Piyush Baranwal. He holds a bachelor’s degree in Engineering (B.E.), has a PGDM to his credit, and is a Chartered Financial Analyst (CFA).
Mr Baranwal holds over 10 years of experience in portfolio management and trading in fixed income securities. Prior to joining, YES Mutual Fund in October 2018, Mr Baranwal has worked as an Investment Manager for 4.5 years with BOI AXA Investment Managers, before that with Morgan Stanley Investment Management for 4.5 years, and was a part of Principal PNB Asset Management from May 2008 to Jan 2011.
Currently at the fund house Mr Baranwal manages Yes Liquid Fund. Yes Liquid Fund was the first scheme launched by Yes Mutual Fund when it made its debut in the industry recently. Since inception in January 2019, (under Mr Piyush Baranwal) the absolute return of the fund is 2.35%, 0.06% higher than the Crisil Liquid Fund Index (benchmark) return of 2.29%.
The outlook for Yes Ultra Short-Term Fund
The main risks with investments in debt securities are interest rate risk, credit risk and liquidity risk. Interest rate risk associated with debt instruments depends on the macroeconomic environment. It includes both market price changes due to change in yields as well as coupon reinvestment rate risk.
So, in the current context factors such as inflation, the direction of policy rates, currency movement, fiscal deficit, and the consequent impact on yields, plus the ratings assigned to debt papers held in the portfolio, etc. are some of the factors that will weigh on the potential performance of YUSTF.
Recently the Indian debt market is engulfed in a liquidity crunch and rating downgrades. After IL&FS, DHFL, and Essel, group, the Reliance ADAG Group companies were downgraded by CARE, even the Yes Bank Limited’s long-term bonds are downgraded by ICRA with a negative outlook assigned to the bonds. ICRA in November 2018, had downgraded the long-term ratings of Yes Bank and kept them on ‘watch’. A number of debt mutual fund schemes have exposure to these toxic debt papers, which has ultimately weighed on their performance.
Hence it’s crucial to see how the fund manager will assess these aspects during portfolio construction. Thus the fortune of YUSTF will be hinged on the quality of paper of money market instruments and debt securities held in its portfolio.
Note that similar funds of the category do take an exposure to debt instruments which are below AAA rating to clock higher returns that involves high risk. Hence consider your risk appetite and time horizon before investing in YUSTF.
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