Mutual Funds

Why Axis Short Term Fund is a good investment

Maulik Madhu BL Research Bureau | Updated on September 12, 2021

Markets can ill-afford a distrust of mutual funds relif

The scheme is a high-quality, low-risk option

Highlighting the need to be supportive of growth, the RBI kept the repo rate unchanged and continued with its accommodative stance in the August monetary policy review. Alongside, the RBI also upped the quantum of its VRR (variable reverse repo) auctions in its effort to normalise liquidity and keep short-term interest rates from falling.

However, the central bank emphasised that this was not to be construed as a move away from accommodation. Also, given the focus on growth, the market expects a repo rate hike only in 2022 and not earlier.

With the future trajectory of interest rates uncertain, those with a moderate risk appetite and one- to three-year investment horizon can consider investing in short-duration funds.

These funds invest in debt and money market instruments such as corporate bonds, debentures, certificates of deposits (CDs), treasury bills (T-Bills), and government bonds such that the Macaulay duration of the portfolio is 1-3 years.

The returns from this category can be more volatile than those from other shorter duration (or average maturity) categories such as low-duration funds and money-market funds. But given that they invest in relatively higher-maturity debt papers, the average returns can be higher.


Rate cycle upturn

Those invested in short-duration funds stand to gain once the rate cycle starts turning up as these funds can then start investing in higher-return debt papers. At the same time, compared to medium- and longer-duration funds, these schemes carry lower interest-rate risk. So when interest rates rise, short-duration funds, which hold relatively lower maturity debt papers, will be impacted to a smaller extent in the form of a fall in bond prices (capital loss).

To play it safe on the credit risk front, only go for schemes with high credit-quality portfolios. One such scheme is Axis Short Term Fund.

Performance comparison

Over the last seven years, the short-duration fund category has delivered one-year and three-year average rolling returns of 8.2 per cent and 7.8 per cent (CAGR) respectively. Compared to this, Axis Short Term Fund has returned 8.9 per cent and 8.5 per cent over the respective periods. During this period, the scheme had nearly no instances of 1-year and 3-year returns (CAGR) of less than 5 per cent. The scheme’s standard deviation (SD) of 0.50 is in line with that of many of its peers and lower than that of a few others. SD is an indicator of the volatility in scheme returns. Higher the SD, greater the volatility. So, if a scheme has an SD of 0.5 per cent and an average return of 8 per cent, that means the actual scheme returns can range from 7.5 per cent to 8.5 per cent.

Only funds with a minimum history of seven years and assets under management (AUM) of at least ₹300 crore have been considered here. Axis Fund has been around since January 2010 and has an AUM of around ₹12,000 crore.

Portfolio details

Axis Short Term Fund follows a high-quality low-risk investment strategy. The scheme is currently invested in a mix of 1-year corporate bonds and money market instruments along with a portion in higher-rated longer-duration corporate bonds.

While the shorter maturity debt papers should help in capping the interest rate risk, the longer-dated bonds can fetch relatively better returns in the current low-interest environment.

As of July end 2021, the scheme portfolio had an average maturity of 2.90 years. A detailed maturity-wise break-up shows that 27 per cent and 39 per cent of the scheme assets were in debt papers with a residual maturity of up to one year and 1- 3 years, respectively. Those maturing later — that is, in 3-5 years and beyond that — constituted another 11 per cent and 14 per cent, respectively.

In terms of credit quality, the safest sovereign and AAA-rated debt papers accounted for around 83 per cent of the portfolio as of July end 2021. Another 9 per cent was in AA+ papers. Only a little over 1 per cent was in AA debt papers and nothing in those rated below this. By and large, in the past too, only a small proportion has been invested in below AA+ rated papers.

Published on September 11, 2021

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