Birla Sun Life Short-Term Opportunities Fund - BUY

Instead of taking an interest rate risk by investing in long-term gilt funds, investors should also evaluate bond funds that follow an accrual strategy.

Such funds capitalise on interest receipts rather than gains from bond prices. They bet on lower-rated bonds that offer higher rates. Birla Sun Life Short-Term Opportunities Fund is one such fund that invests in low-rated corporate bonds that offer higher yields than higher rated commercial papers.

The fund has outperformed its benchmark index consistently over one-, three- and five-year time periods. Investors with a 12- to 18-month investment horizon can consider investing in the fund. The scheme has delivered compounded annual growth of 8.8 per cent over the past five years, compared to the 7 per cent delivered by its benchmark, the CRISIL Liquid Fund Index. But the fund switched its benchmark to the CRISIL AA Short-Term Bond Index from May 2013 onwards. This is a better yardstick to measure the fund’s performance, as the fund invests across different rated bonds.

The fund has outperformed its new benchmark over the last one year. In an accrual strategy, the fund manager looks for shorter duration corporate bonds that deliver high yields. Birla Sun Life Short Term Opportunities Fund focuses on returns from high accrual of interest on bonds in the fund’s portfolio. Thus, the fund manager takes a selective call on bonds issued by companies in the lower credit segment. This helps generate better returns through credit exposure instead of duration exposure. Birla Sun Life Short Term Opportunities invests mainly in corporate debt, which constitutes 83.5 per cent of its portfolio, while 6.2 per cent is in commercial paper. The fund has higher exposure to AAA-rated bonds, suited for risk-averse investors. AAA bonds constitute 43 per cent of the fund’s holdings, while another 22.5 per cent are in AA-rated bonds and 10.5 per cent are in the below AA category. Currently, the YTM(yield-to-maturity) of the fund is 10.1 per cent and the duration is 1.69 years.

The fund has consistently beaten its benchmark (CRISIL Liquid Fund Index) across all rate cycles. It has performed consistently in both up and down rate cycles – March 2010 to October 2011 (up) and April 2012 to May 2013 (down) – delivering close to 13 per cent returns during both the boom and the slowdown. Even in the current year, when rates went up by 75 basis points, the fund has managed to deliver 9.7 per cent returns. The fund has been managed by Lokesh Mallya and Sunaina Da Cunha since 2011.