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Investors with a two-year horizon can consider investing in the units of income fund, Templeton India Short-Term Income Plan (TISTIP).
With an annual return of 8 per cent and 9.1 per cent over a three- and five-year period, respectively, the fund is among the top performing funds in its category. It outperformed its benchmark (CRISIL Short-Term Bond Fund Index) by a good 1.6 percentage points during these periods.
Even though short-term interest rates have declined over the last three months, the fund may deliver good returns as it holds a portfolio with yield to maturity of 10.5 per cent (as of May 31, 2012) and average maturity of close to a year.
Additionally, the decline in short-term rates is due to lack of demand for funds from the companies; this being a common phenomenon during the first half of a fiscal (March-September). Once the demand for funds rises, the short-term rates can once again be expected to rise. The RBI’s pause on policy rate cut will also support the short-term rates.
Suitability
The fund is suitable for investors who have high surplus but require money over the short to medium term. Such investors may be better off parking some surplus in the fund, instead of their savings bank account.
Even after deregulation of bank savings rate, short-term funds offer better returns. The median 5-month return of TISTIP over the last five years was 8.8 per cent (annualised). Withdrawal within five months of investing would entail an exit load of 0.5 per cent.
As the fund invests in instruments with relatively short maturity, the returns may not be spectacular for investors. But it somewhat eliminates the interest rate risk.
Over the last five years, the fund’s worst return was 5.2 per cent on a rolling one-year basis. It means that the fund managed to protect capital well even in the worst periods.
Performance and portfolio
The one-year return of the fund was 9.5 per cent as against the category average return of 9.3 per cent. The fund chose not to cut its portfolio maturity to low levels - a strategy that quite a few peers adopted. This may have led to its average performance.
TISTIP’s sharpe ratio of 1.63 (assuming 7 per cent as the risk free rate) suggests that it has consistently delivered good returns over the long term adjusted for risks.
This indicates that the fund delivered positive returns over a long term without taking excessive risk. In terms of one-year rolling returns, the fund outperformed its benchmark 95 per cent of the times in the last five years.
As of June 2012, the fund had 55 per cent of the portfolio in money market instruments (certificate of deposit and commercial papers).
Another 44 per cent of the portfolio was invested in slightly longer term instruments such as corporate bonds and pass-through certificates.
If interest rates do fall steeply, the prices of these long-term bonds will rise if the rates are cut thereby offsetting the impact of decline in short-term rates.
The NAV of the fund is Rs 2197.5.
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