Why must you invest in debt funds? Meet MC30’s debt fund stars

Also see: The complete MC30 basket of mutual fund schemes

Why debt funds?

But the big question: why have debt funds in your portfolio?

At a younger age, equity allocation is typically higher. But as we grow older, debt instruments play a bigger role. If equity funds are the way to go to build a portfolio for the long term and beating inflation, debt funds keep your risk levels in check.

Also read: Presenting MC30’s largest equity fund schemes

For instance, when the equity markets failed to deliver positive or optimal returns in the years such as 2011, 2015 and 2018, debt funds came to rescue, delivered positive returns and managed to offset the damage caused due to the underperformance equity counterpart.

 Also read: How to use MC30?

MC30 penalises credit risks

The Franklin Templeton episode taught us many lessons on how too much credit risks can create havoc to our portfolios. MC30 penalised debt funds that invest in securities rated AA and lower. The higher this proportion, the higher was the penalty we gave them. This brought down the scheme’s risk-adjusted ranking.

Too much investment in a single group? Not good

The capital market regulator, Securities and Exchange Board of India (SEBI) does not allow funds to invest more than 20 percent of their corpuses in a single group. At MC30, we kept the threshold at 10 percent. Any exposure to a single group beyond this, as per the latest portfolio, gets penalised.

Also read: MC30: The methodology behind the curated basket of mutual fund schemes

Today, let’s take a closer look at our short-term debt funds.

ICICI Prudential Short Term Fund

ICICI Prudential Short Term Fund (ISTF) is managed actively to ensure reasonable returns, without compromising on portfolio quality. Apart from investing in g-secs (government securities) opportunistically, it invests up to 20 percent of its assets in AA rated and equivalent securities.

Fund manager Manish Banthia says that although the scheme invests in AA rated assets, the fund house’s in-house risk management team monitors the holdings closely. ISTF has held around 7 percent exposure to perpetual bonds (as on June 2021).

At Rs 22,069 crore (as on July 30, 2021), ISTF is the second-largest scheme in its category at present. Its portfolio is well-diversified with over 200 debt securities; the most it has invested in a single corporate group is 4.6 percent.

 HDFC Short Term Debt Fund

HDFC Short Term Debt Fund (HSTF) maintains the portfolio duration between one and three years. It invests over 80 percent of its corpus in the highest rated instruments; around 6-10 percent gets allocated to AA rated and equivalent papers. Despite being hit by the IL&FS crisis in 2019, the scheme recovered. Its holding in IL&FS was just 0.5 percent. And although it holds around 4.8 percent in AT-1 bonds, we don’t think that’s any problem for the scheme.

Axis Short Term Fund

Axis Short Term Fund (ASTF) has been a consistent performer that doesn’t take credit risk. Aside from investing in highly-rated bonds, it allocates to g-secs too, to earn some extra returns.

Also see: The complete MC30 basket of mutual fund schemes

Other than miniscule exposure to Dewan Housing Finance Corporation, the portfolio has consistently been clean. And ASTF recovered its dues from the company.

Like many other debt funds, it has some investments (around 2 percent) in AT1 bonds, but fund manager Devang Shah says there is no risk as they are issued by good-quality banks.