Belying the widespread expectation of a rate cut in its latest monetary policy, the RBI chose to stay pat on rates, causing a knee-jerk reaction in the bond markets. The yield on the 10-year G-Sec spiked by 20 basis points to 6.4 per cent post the monetary policy.

Going ahead, yields can hover in the 6.1-6.4 per cent range, amidst a likely tug of war between global and domestic factors. This leaves little scope for a huge rally in bond prices.

But this does not mean investors should shun debt funds altogether. With deposit rates in a free fall and most banks offering 4 per cent on savings deposit, investors can park some of their money in short-term debt funds that offer better post-tax returns.

Birla Sun Life Savings Fund is a short-term debt fund. Over the past decade or so, the fund has delivered stable returns, making for a good track record. Over three- and five-year periods, the fund has delivered 9.3 per cent and 9.4 per cent return, respectively, making it a good alternative to savings deposits.

Risk-averse investors, wary of wild swings in debt fund returns, can park money in this fund.

Impressive results

Birla Sun Life Savings Fund, on an average, has delivered 8.5-9.5 per cent returns annually over the long run — five to 10-year period. For investors looking to invest for a period of less than three years, returns will be taxed at the income tax slab rates. In savings deposits, interest up to ₹10,000 is exempt under Section 80TTA of the Income Tax Act.

But if you hold over ₹2,50,000 in savings accounts, short-term debt funds offer better returns. An 8 per cent return would work out to post-tax returns of 7.2 per cent, 6.4 per cent and 5.5 per cent, respectively, for individuals in the 10, 20 and 30 per cent tax bracket. This is higher than the 4 per cent that most banks offer. Only a handful offer a higher 6 per cent interest.

One has to keep in mind that while returns from short-term funds can vary with market, short-term funds with good track record have delivered returns in the 7-9 per cent over the long run.

Birla Sun Life Savings Fund has delivered an annual return of 7.8 per cent return since inception.

Low risk

Historically, Birla Sun Life Savings has maintained a portfolio of debt securities with high credit rating.

Over the past three years, around 70 per cent of the portfolio has been invested in either government securities, AAA or A1+ rated papers. This lowers the credit risk of the fund.

Modified duration represents the sensitivity of a bond’s price to a change in the interest rate. A higher modified duration indicates higher sensitivity and vice versa.

The fund’s interest rate risk is also mitigated by its lower duration — under one to 1.3 years. Over the last three years, while the fund maintained an average duration of 0.6 years, it increased it sharply since March this year to a little over one year to take advantage of the fall in yields. The fund has delivered a healthy 9.4 per cent return over the past year.

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