Central banks across the world, including RBI, are likely to tame inflation. A higher interest regime is bad news to debt mutual funds. However, the prevailing market seems to be well-positioned for short-term debt investors. Given the reasonable yields on 1 to 3-year G-sec and AAA-rated securities, debt investors may have an opportunity to consider investing in short-duration funds.

Many conservative investors seek to choose short-duration debt funds to ride the volatile phase in the money market. Short-duration funds are ideal to tide over the uncertainties of interest rate hikes. According to the Sebi mandate, short-duration funds can invest in debt instruments with maturity between 1 and 3 years. When it comes to the interest rate risk, short-duration funds fall somewhere in the middle. These funds are riskier than liquid funds, ultra-short duration, and low duration funds. However, they have a lower risk compared to medium duration and long duration funds.

For risk-averse debt investors seeking risk-adjusted returns that are superior to an FD or other conventional investment options, short-duration funds are an ideal option. Short-duration funds provide regular income through a combination of interest earnings and capital gains. Investors with a moderate risk appetite can allocate a part of their portfolio to these funds amidst the volatile market.

JM Financial Mutual Fund has launched JM Short Duration Fund, it is an open-ended short duration debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 1 year and 3 years. The scheme aims to invest in high-quality debt securities to generate stable returns with a low-risk strategy while maintaining liquidity through a portfolio comprising debt and money market instruments.

Table 1: JM Short Duration Fund

Type An open-ended short-duration debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 1 year and 3 years. A moderate interest rate risk and moderate credit risk. Category Debt Scheme – Short Duration Fund
Investment Objective The scheme will endeavour to generate stable returns with a low-risk strategy while maintaining liquidity through a portfolio comprising of debt and money market instruments. Investors are required to read all the scheme-related information set out in the offer documents carefully.
However, there can be no assurance that the investment objectives of the scheme will be realized. The scheme does not guarantee/ indicate any returns
Min. Investment Rs 5,000/- and multiples of any amount thereafter. Additional Purchase Rs 1,000/- and multiples of any amount thereafter. Face Value Rs 10/- per unit
  • Direct
  • Regular
  • Growth
  • Income Distribution Cum Capital Withdrawal (IDCW)
Entry Load Not Applicable Exit Load Nil
Fund Manager Mr Gurvinder Singh Wasan
Ms Shalini Tibrewala
Benchmark Index CRISIL Short Duration Fund BII Index
Issue Opens: August 10, 2022 Issue Closes: August 22, 2022

(Source: Scheme Information Document

The investment strategy for JM Short Duration Fund will be as follows:

JM Short Duration fund will predominantly invest in a combination of debt and money market instruments having varied yields and maturity profiles. The scheme is being positioned as a product having the essence of both debt and money market schemes. As such the product is being positioned as an intervening product between the long-term debt scheme and liquid scheme.

The Investment strategy of the scheme would be such that the Macaulay Duration of the portfolio would be between 1 year to 3 years. Further, the composition of the maturity profile of the instruments may vary substantially from time to time depending on the changes due to the purchase and repurchase of units.

The scheme adopts a scientific approach to investments. Securities are selected for various funds by the fund managers based on a continuous study of trends in industries and companies, including management capabilities, global competitiveness, earning power, growth/ payout features and other relevant investment criteria, which would, inter-alia include evaluation of the outlook of the economy, exposure to various industries and geographical regions, evaluation of the intrinsic worth of specific opportunities such as primary market transactions, private placements, trading opportunities etc.

The scheme will be actively managed and the fund managers will be responsible for taking day-to-day investment decisions and will inter-alia be responsible for asset allocation, security selection and timing of investment decisions.

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

Table 2: Asset Allocation for JM Short Duration Fund

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Debt and Money Market instruments (including securitised debt) # 0 100 Low to Medium

# The Scheme shall invest in the debt securities issued by REITs and InvITs, subject to compliance with all applicable regulatory provisions.

(Source: Scheme Information Document

Who will manage JM Short Duration Fund?

Mr Gurvinder Singh Wasan and Ms Shalini Tibrewala will be the designated fund managers for this scheme.

Mr Gurvinder Singh Wasan is a Chartered Accountant (CA), CFA, Charter Holder and holds a degree in M.Com. He has an overall experience of 18 years in the fixed income markets and his previous assignments include working as a Fund manager and a credit analyst with a mutual fund and as a structured finance manager with a rating agency and a bank. Prior to joining JM Financial AMC, he worked with ICICI Bank, CRISIL, and Principal Asset Management company.

At JM Financial Mutual Fund, Mr Wasan currently manages, JM Medium to Long Duration FundJM Dynamic Bond Fund and JM Low Duration Fund.

Ms Shalini Tibrewala is a A.C.A., C.S. and B.com graduate. She has over 25 years of experience in the financial services sector. Prior to joining JM Financial AMC, she was working with a firm of Chartered Accountants.

At JM Financial Mutual Fund, Ms Tibrewala currently manages, JM Liquid FundJM Low Duration Fund and JM Overnight Fund.

Fund Outlook – JM Short Duration Fund

JM Short Duration Fund aims to generate stable returns with a low-risk strategy while maintaining liquidity through a portfolio comprising debt and money market instruments. The scheme will invest in G-Secs & AAA-rated instruments which offer high credit quality and high liquidity to the portfolio.

The scheme offers debt investors the potential to generate optimal risk-adjusted returns as compared to traditional investment avenues. The scheme endeavours to build a high-quality debt portfolio for the short-term such that the Macaulay Duration of the portfolio would be between 1 year to 3 years. Given that short-duration funds invest in bonds of fairly short maturity, the impact of the interest-rate movements or the upward bias on yields on these funds is going to be limited.

The scheme may continue to earn from the interest income that they receive from the underlying bonds they hold. The advantage of short-duration funds in a rising interest rate environment is that they can re-invest the maturity proceeds of an instrument in a higher-yielding instrument. This offers higher returns over sufficiently long investment tenures.

Although the scheme has low credit risk and this may sound like a high return potential investment in the short-term, it is still prone to debt market risks. While the interest rate risk of short-duration funds is relatively low, these funds can be volatile in the short term, they may generate negative returns due to periodic episodes of volatility caused by varying market conditions. Also, the scheme being actively managed, the fund manager’s ability to construct the debt portfolio remains to be seen.

In addition, the persistent repercussions of the Russia-Ukraine conflict, spiralling inflation and the RBI’s recent announcement to hike policy rates again by 50 basis points to curb demand and control inflation may cause a significant risk to the economic growth and continue the prevailing high market volatility. These factors among others may have an adverse impact on the scheme’s performance.

Thus, this scheme is suitable for investors with an investment horizon of 1-3 years, those looking for regular income over the short to medium term, and those with a moderate appetite for interest rate risk and credit risk.

This article first appeared on PersonalFN here

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