What:

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An ultra-short duration debt fund

Why: Generates higher returns than peers without taking high risk

Whom: Risk averse investors looking for an FD alternative

In an interest rate cycle that’s starting to move up, funds with shorter maturities can reflect the higher rates more quickly and are less volatile at the same time. Aditya Birla Sun Life Savings is a good option in this context, especially for those looking for higher returns than fixed deposits and prefer low volatility in returns.

Aditya Birla Sun Life Savings (ABSL Savings) average 1-year rolling return over the past three years is 8.4%. 1-year FD rates in the past 3 years have averaged around 7.5%. The fund is a recent addition to our select fund list.

The fund and its performance

ABSL Savings is an ultra short duration fund; we had classified it under the ultra short-term category in our earlier categorisation. ABSL Savings earlier ran a longer 1-1.5 year average maturity, which it has now brought down to 5-6 months to comply with SEBI’s definition for the category.

This maturity adjustment is not a huge stretch for the fund. Ultra short term funds often run very short maturities especially in rising rate cycles. ABSL Savings’ shorter-term 3-month and 6-month return remain on par with top-performing low duration funds such as ICICI Prudential Savings and UTI Treasury Advantage.

ABSL Savings sports a portfolio of bank certificates of deposits, commercial papers, treasury bills, and low-maturity corporate debt. Depending on the rate cycle, the fund tends to reduce or increase exposure to money market instruments and corporate debt. For much of 2017 for example, with CD and CP rates on the lower side, the fund held higher exposure to corporate debt and kept a fifth or lower towards money market instruments. This share has been stepped up to 40% now as it reduced average maturity and as yields on these instruments also moved up.

Several funds in this category, such as Franklin India Ultra Short, L&T Low Duration, and Kotak Low Duration and Principal Low Duration have credit exposures of over 30% of their portfolio. ABSL Savings does not hold papers below AA, unlike its more risk-taking peers.

In ABSL Savings, the share of papers rated below AA+ has averaged around 15% in the past year. This is lower than the peer average of 18%. Peers here include both ultra short duration and low duration funds.

ABSL Savings portfolio yield to maturity has been on par with or at times higher than the average for peers, which include funds that take higher credit risk. Its July YTM of 8.07% is close to funds such as Tata Treasury Advantage and ICICI Prudential Savings.

Returns for ABSL Savings have held above the category average. Rolling 1-year returns since 2010 has it beating the average return of these funds all the time. This is a consistency that’s matched by few peers. ABSL Savings has not delivered a loss in a 3-month or higher timeframe in the past decade.

The average 1-year rolling returns in the past 3 years are 8.37%, placing it in the top quartile among peers. Longer 3-year average rolling return for 5 years works out to 9.2% on an average for the fund, below only Franklin Ultra Short Bond and Franklin Low Duration, both of which take excessive credit risk.

Another factor that works in ABSL Savings’ advantage is its expense ratio, which is among the lowest in its category. The fund also consistently generates above-average risk adjusted returns (measured by the Sharpe ratio).

Suitability

ABSL Savings suits investors with any timeframe of over 3 months. It is a good option especially for those who do not prefer volatility in their debt portfolio and simply want FD-plus returns. The fund’s minimum 1-year return over the past 3 years is 6.47%, which is still higher than the lowest (in the past 3 years) 1-3 year FD rates of 6.25%. Holding the fund for over 3 years allows indexation benefits; capital gains post indexation are taxed at 20%. FD interest is taxed at slab rates.

The fund can also be used for income generation through systematic withdrawals, provided withdrawal starts about 6 months after initial investment. The fund has no exit load.

The fund has an AUM of Rs 18,728 crore. Kaustubh Gupta and Sunaina Da Cunha are the fund’s managers.

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.

This article was first published on FundsIndia.com and can be accessed here.