Lately, there has been a rise in launch of debt funds holding debt instruments having a duration of less than a year. This is because recent episodes of default in payments have led to downgrading of companies and made investors lose interest of investing in debt funds, as most of the debt funds were having exposure to the toxic papers of defaulters.
And Fund houses wanted to offer respite to the distraught investors, to keep them interested in debt fund investment.
Hence even Sundaram Mutual Fund launched an open-ended debt scheme, Sundaram Ultra Short-Term Fund (SUSTF) that will invest in instruments with Macaulay Duration of the portfolio between 3 months to 6 months
Ultra-short-term funds invest primarily in debt and money market instruments such that the Macaulay duration of the portfolio is between 3 months to 6 months. 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 risks and offer better returns than most money market instruments.
The Macaulay duration measures the weighted average term to maturity of the bond’s cash flow. The weights in this weighted average are the present value of each cash flow as a per cent of the present value of all the bond’s cash flows.
Macaulay’s Duration is linked to the price volatility of a bond. Duration is the fund manager’s tool for structuring a portfolio of bonds to have the desired sensitivity to maintain between 3 to 6 months. As per the mandate, SUSTF will allocate all its assets in derivatives, securitised debts and in repo within the prescribed limits.
From the risk-return standpoint, SUSTF is a relatively moderately low risk-return. If you are planning for short-term goals, to where the money is required in 3 to 6 months, the ultra-short-term fund may be considered. The ideal time horizon to park money in an ultra-short-term fund is 3 to 6 months.
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Table 1: NFO Details
| Type | An open-ended debt scheme investing in instruments with Macaulay Duration of the portfolio between 3 months to 6 months. | Category | Ultra-Short Duration Fund |
| Investment Objective | To generate regular income by investing predominantly in debt and money market instruments. No Guarantee: Investors are neither being offered any guaranteed/indicated returns nor any guarantee on repayment of capital by the Schemes. There is also no guarantee of capital or return either by the mutual fund or by the sponsor or by the Asset Management Company. |
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| Min. Investment | Rs 1,000 and in multiples of Re 1 thereafter | Face Value | Rs 10 per unit |
| Plans | • Direct • Regular |
Options | • Growth (default option) • Dividend
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| Entry Load | Not Applicable | Exit Load | Nil |
| Fund Manager | Mr Siddharth Chaudhary and Mr Sandeep Agarwal | Benchmark Index | CRISIL Ultra Short Term Debt Index |
| Issue Opens | 14/06/2019 | Issue Closes: | 20/06/2019 |
(Source: Scheme Information Document)
How will Sundaram Ultra Short-Term Fund allocate its assets?
Under normal circumstances, the asset allocation pattern will be as under:
Table 2: SUSTF’s Asset Allocation
| Instruments | % of the Investible funds (indicative) | Risk Profile |
| Debt instruments, Money Market instruments & cash and cash equivalents* | Up to 100% | Low to Medium |
* Ensuring that the Macaulay duration of the portfolio will be maintained between 3 to 6 months.
- Exposure to derivatives will be limited to 50% of the net asset value of the Scheme at the time of transaction.
- Debt securities may include securitised debts up to 25% of the net assets
- The Scheme shall invest in the repo in Corporate Bond up to 10% of the net assets of the scheme
(Source: Scheme Information Document)
What will be the Investment Strategy?
Sundaram Ultra Short-Term Fund is an open-ended ultra-short duration debt scheme investing in instruments with Macaulay duration of Portfolio is between 3 months and 6 months. The scheme will invest its corpus in the entire range of debt and money market securities in line with the investment objective to provide regular returns to its investors through active management of the portfolio.
The investment will be made primarily in debt securities & money market instruments with a high credit rating. Purchases of securities may be made either through initial public offer, private placement, through rights offerings, purchase on the floor of a recognised stock exchange or through negotiated deals on the secondary market.
The scheme may invest in non-publicly offered securities on the merits of the investment proposals. The Scheme does not aim to concentrate on investments in any particular industry. The investment shall be made across industries, sector and promoter group.
The fund managers shall invest in the instruments rated as investment grade or above by a recognised rating agency. In case instruments are not rated, mutual funds may constitute a committee which can approve such proposals for investments in unrated instruments subject to the approval of the detailed parameters for such investments by the Board of Directors and the Board of Trustees. With this composition, the scheme shall be able to meet the normal repurchase/redemption requirement.
The Scheme has no specific target relating to portfolio turnover. The scheme may also resort to temporary borrowing within the limits laid down in the regulation. The fund managers will keep in mind the Investment Objective of the Scheme and the applicable Regulations.
Although every endeavour will be made to achieve the objective of the Scheme, the Fund Managers/Sponsor /Trustee does not guarantee that the investment objectives of the Scheme will be achieved. No guaranteed returns are being offered under the Scheme.
Who will manage the Sundaram Ultra Short-Term Fund?
Sundaram Ultra Short-Term Fund will be co-managed by Mr Siddharth Chaudhary and Mr Sandeep Agarwal.
Mr Siddharth Chaudhary is a commerce graduate (B. Com) and holds a Post-graduate diploma in Securities Market.
Mr Chaudhary has 8 years of experience in portfolio management and trading in fixed income securities. Prior to joining, Sundaram Asset Management Company in September 2010, Mr Chaudhary has worked as a Fixed Income & Derivatives Dealer at the Indian Bank.
Currently at the Sundaram Mutual Fund, he manages Sundaram Money Fund, Sundaram Low Duration Fund, Sundaram Fixed Income Term Fund, Sundaram Banking & PSU Debt Fund, Sundaram Capital Protection Oriented Fund 5 Years (Series 7), Sundaram Capital Protection Oriented Fund 5 Years (Series 8), Sundaram Debt Oriented Hybrid Fund and Sundaram Hybrid Fund Series (Debt portion).
Mr Sandeep Agarwal holds a bachelor’s degree in Commerce (B. Com), is a qualified Chartered Accountant (ACA) and a Company Secretary. He has 7 years of experience in Fixed income portfolio management and securities.
He has been associated with Sundaram Asset Management Company Ltd from October 2010, first as a Dealer of Fixed Income and since September 2012 he has been a Fund Manager of Fixed income. Prior to that, he worked as an Investment Analyst of Fixed Income at Deutsche Asset Management Company.
Currently at the fund house, some of the schemes which Mr Sandeep co-manages include; Sundaram Corporate Bond Fund, Sundaram Medium Term Bond Fund, Sundaram Short Term Debt Fund, Sundaram Debt Oriented Hybrid Fund, Sundaram Short Term Credit Risk Fund and Sundaram Fixed Term Plan series.
The outlook for Sundaram 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.
In India, RBI operates both as the monetary authority and the debt manager to the government. In its role as a monetary authority, the RBI participates in the money market through open-market operations as well as through Liquidity Adjustment Facility (LAF) to regulate the money supply.
Currently, the 10-yr G-Sec yield eased by good 38 bps in May 2019 and since the 1st bi-monthly monetary policy for 2019-20, by 32 bps. So far in 2019, the benchmark yield is down by 34 bps. As regards the liquidity conditions in the system, after remaining in deficit during April and most of May due to restrained government spending, it turned into an average daily surplus of Rs 660 billion in early June, the RBI observed.
In the 2nd bi-monthly monetary policy statement for 2019-20 (held in June 2019), the RBI predictably reduced the policy rate by another 25 bps, placing the repo rate at 5.75% and consequently the reverse repo rate at 5.50%. and the Monetary Policy Committee (MPC) changed the stance of monetary policy from neutral to accommodative and it reduces the scope of further reduction in policy rates by the RBI to accommodate growth concerns.
But recently the Indian debt market is undergoing a stressed situation due to rating downgrades. IL&FS, DHFL, Essel group, and the Reliance ADAG Group companies were downgraded, even the Yes Bank Limited’s long-term bonds were downgraded by ICRA with a negative outlook assigned to the bonds.
Hence, it’s crucial to see how fund managers will assess these aspects during portfolio construction. Thus, the fortune of SUSTF will be hinged on the quality of paper of money market instruments and debt securities held in its portfolio.
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