The recent Reserve Bank of India measures to rescue the rupee by tightening liquidity in the bond markets has created a good investment opportunity for retail investors. They can now earn a healthy debt market return of 8-10 per cent, by investing in select ultra-short-term debt mutual funds.

These funds invest in certificates of deposit (CDs) from banks, commercial paper (CP) issued by companies and Government treasury bills . They hold securities for about three to six months. Following RBI moves, all these instruments today offer attractive rates. The yield on one-year CD up by nearly 200 basis points, now hover at 9.8 per cent levels. The 364-day treasury bill offers 10.5 per cent. Short-term interest rates have gone up by almost 300 basis points in just a few weeks.

While debt funds, which hold long-term government or corporate bonds, may see price erosion if interest rates spike further, ultra short-term bond funds are likely to see limited impact. For them, the higher interest receipts on the securities they hold will make up for any price erosion.

This makes it a good time for investors to lock into shorter duration debt funds. Ultra-short-term funds can help investors ride out the increasing rate cycle through protection against interest rate risks.

Ultra-short-term funds have typically delivered 7-8 per cent annual returns over the last year. But with liquidity likely to remain tight over the next few months, until RBI reverses its latest moves, these funds may be able to better this performance.

So, which ultra-short-term funds should you bet on? We filtered the existing funds on the basis of their current portfolios, return record, credit profile and retail focus. We selected only funds which have a mix of CDs, CPs and treasury bills for adequate diversification. We stayed with funds that invested in AAA or equivalent-rated paper. We recommend funds with a ‘retail’ option, to avoid churn in the asset base.

The following funds made the cut:

Templeton India Ultra Short Bond Retail has outperformed its benchmark. The fund invests in a mix of money market and debt instruments. It has invested 38 per cent in debentures, 33 per cent in CDs and 25 per cent in CPs. It has delivered 8.54 per cent over the last one year.

Birla Sunlife Ultra Short Term Retail has invested 28 per cent in CDs, 23 per cent in debentures, bonds 19 per cent and 11 per cent in CPs. It has delivered 8.25 per cent over the last one year.

ICICI Prudential Flexible Income Retail invested 27 per cent in CDs, 23 per cent in CPs, 20 per cent in term deposits and 19 per cent in debentures. The fund has outperformed its benchmark Crisil Liquid index and delivered 7.84 per cent in the last one year.

All three are open ended funds which investors can buy or sell at any time.

Related Topics
comment COMMENT NOW