After a cumulative 250 bps rate cut since 2019, interest rates appear to have bottomed out and are expected to inch up in the coming years. When that happens, there will be an adverse impact on the returns from long duration debt funds. Thus, the short-term debt fund category currently looks attractive from investment point of view.

What is a short-term debt fund?

Short-term debt funds invest in bonds or instruments with a Macaulay duration of between one to three years. It is suitable for low-risk investors with a similar investment horizon. Macaulay duration measures the average time that would be taken to receive the cash flows from the invested instrument. It is the weighted average term to maturity of the cash flows from an instrument.

You see, the bond prices are inversely related to the interest rates. 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. A short-term debt fund help investor reduces this interest rate risks and offers better risk-adjusted returns than most money market instruments. It is a tax-efficient investment as compared to fixed deposits for investors in the higher tax brackets.

Mahindra Manulife Mutual Fund has launched a scheme in this category viz. Mahindra Manulife Short Term Fund, an open-ended short term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 1 year and 3 years. It aims to invest predominantly in high-rated and liquid securities.

Table 1: Details of Mahindra Manulife Short Term Fund

Type An open ended short term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 1 year and 3 years Category Short Duration Fund
Investment Objective The investment objective of the Scheme is to generate income and capital appreciation through an actively managed diversified portfolio of Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year to 3 years. However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved. The Scheme does not assure or guarantee any returns.
Min. Investment Rs 1,000 and in multiples of Re 1/- thereafter Face Value Rs 10/- per unit
  • Direct
  • Regular
  • Growth
  • Dividend
Entry Load Not Applicable Exit Load Nil
Fund Manager
  • Mr Rahul Pal
  • Mr Kush Sonigara (For overseas investments)
Benchmark Index CRISIL Short Term Bond Fund Index
Issue Opens February 09, 2021 Issue Closes February 16, 2021

(Source: Scheme Information Document

What will be the Investment Strategy for Mahindra Manulife Short Term Fund?

Mahindra Manulife Short Term Fund will invest in a diversified portfolio of debt and money market instruments to generate stable income and capital appreciation with relatively lower credit and interest rate risk. The scheme will maintain the Macaulay duration of the portfolio between 1 year to 3 years.

The investment team follows Risk Guard process – an internal research and process framework used to select securities and to assess, predict and manage risks better.

The investment team of the AMC will, as a mitigation and risk control procedure, carry out rigorous credit evaluation of the issuer company proposed to be invested in. Also as a part of the risk mitigation framework, the investment team would keep adequate liquidity buffers in form of liquid securities to manage any drawdowns.

The core investment architecture and the approach towards the portfolio under normal circumstances will be based on these parameters:

  • Quality – Look to deploy dominant part of the portfolio in high quality securities
  • Duration – Target a portfolio duration of 1 – 3 years
  • Diversification – Aim to minimize concentration risk by continuously monitoring sector and group exposures
  • Liquidity – Laddered approach to liquidity

The fund positioning would be overarching with accrual/credit calls at the short end of the yield curve and rates call with a mix of short and long highly rated securities. It will enhance risk adjusted return through asset allocation within credits and sovereign securities basis underlying demand supply scenario and evolving macro views.

The endeavour would be to complement fund performance through tactical positioning across term structure at appropriate times.

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation of Mahindra Manulife Short Term Fund

Instruments Indicative Allocations (% of Net Assets) Risk Profile
Minimum Maximum High/Medium/Low
Debt* and Money Market Instruments 0 100 Low to Medium
Units issued by REITs & InvITs 0 10 Medium to High

*Includes securitized debt (excluding foreign securitized debt) and debt instruments having structured obligations/credit enhancements (such as corporate / promoter guarantee, conditional and contingent liabilities, covenants, pledge and / or Non Disposal Undertaking of shares etc) up to 35% of the net assets of the Scheme.

(Source: Scheme Information Document

Who will manage Mahindra Manulife Short Term Fund?

Mr Rahul Pal and Mr Kush Sonigara will manage Mahindra Manulife Short Term Fund.

Mr Rahul Pal is Head – Fixed Income at Mahindra Manulife Investment Management Pvt. Ltd., prior to this he was associated as Head – Fixed Income with Taurus Asset Management Co. Ltd. and Fund Manager – Fixed Income at Sundaram Asset Management Co. Ltd.

His qualifications include (H) and ACA. Currently schemes managed by him are; Mahindra Manulife Low Duration FundMahindra Manulife Credit Risk Fund, Co- Fund Manager of Mahindra Manulife Liquid FundMahindra Manulife Overnight Fund and Mahindra Manulife Ultra Short Term Fund, only debt portion Mahindra Manulife Equity Savings Dhan Sanchay YojanaMahindra Manulife Hybrid Equity Nivesh Yojana and Mahindra Manulife Arbitrage Yojana.

Mr Kush Sonigara is Research Analyst – Fixed Income at Mahindra Manulife Investment Management Pvt. Ltd. and prior to this he was working with Taurus Asset Management Co. Ltd. as Fixed Income Dealer, Research Analyst – Fixed Income at My Capital Solutions Pvt. Ltd. and Product Manager TBNG Financial Consultants.

He will be dedicated fund manager looking after overseas investments of this scheme.

Fund Outlook – Mahindra Manulife Short Term Fund

Mahindra Manulife Short Term Fund invests in debt & money market instruments that mature in 1 to 3 years’ time frame. Short Term Funds can provide higher returns compared to bank fixed deposits for such tenure.

The Fund Manager will seek to play out the yield curve and exploit anomalies if any in the curve, for the portfolio construction after analysing the macro-economic environment including future course of system liquidity, interest rates and inflation along with other considerations in the economy and markets.

The Fund Manager may also initiate tactical allocation in the portfolio according to the prevalent market conditions in order to generate alpha in the scheme.

However, do note that, debt funds (including short duration funds) are not risk free; they are prone to various risk such as credit risk, liquidity risk, and interest rate risk, etc. So before investing in short term debt fund consider your investment objective, time horizon, risk appetite. Apart from this pay attention to parameters such as portfolio quality and the maturity profile.

Mahindra Manulife Short Term Fund can be considered by moderate to high risk taking investors, liquidity and yield with a 1 to 3 year horizon. Investors seeking an alternative option for traditional bank FDs, may consider short duration debt to earn better risk-adjusted returns.

This article first appeared on PersonalFN here

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