How to find the best performing short duration fund in India?

Just as Mutual Funds have become affordable for the masses due to SIPs, they have become less overwhelming for most investors due to their debt category. All investors do not have the heart of a champion to take on the volatility and risk present in equity markets. However, debt funds make it possible for all types of investors (irrespective of their risk appetite) to enter into the mutual fund landscape. In this article, we will talk about short-duration debt funds – their benefit and how to find the best of the lot.

Short Duration Debt Funds Benefits

Short Duration Funds are open-ended debt schemes that invest in instruments (debt or money market) with a maturity period of one to three years. The key benefits of these mutual funds are:

1. These schemes have a lower risk quotient compared to equity investments as well as many other debt schemes such as credit risk, higher duration funds

2. They usually offer stable returns across various market periods

3. Short duration funds have good liquidity. As a result, they are suitable for contingency funds or such investments

4. One of the biggest debt funds benefit is indexation for taxation purposes. Short duration fund investments get this benefit when the holding period is more than three years. Due to this, they become financially more attractive to traditional instruments such as FDs, etc.

Factors to keep in mind for short duration funds investment in India

• Costs (Expense Ratio)

Each fund house charges a fee (known as the expense ratio) from the investors to manage their funds. Expense Ratio is a key factor while making short-duration funds investment in India. Debt funds with lower Macaulay duration (such as short-duration funds) have little or restricted upside potential in comparison to equity funds. Hence, any additional cost can further reduce the net earnings from your investment. If you need to choose between two short-duration funds, Ceteris paribus, the one with a lower expense ratio can help you optimize your returns on investment.

• Portfolio composition

A critical element in Debt fund investment is the creditworthiness of the borrower (issuer of bonds). This is denoted by the credit rating assigned to the borrower. For example, “AAA” rated instruments have the least default or credit risk while “C” rated instruments carry the highest risk.

Before going ahead with your short-duration fund's investment in India, you should analyze the fund’s factsheets to check the fund’s credit risk exposure and also whether the same is in sync with your own risk appetite.

• Interest Risk

One of the most striking short duration debt fund benefits is its ability to give higher returns as compared to overnight or low duration funds. However, it is important to track the fund’s interest rate risk by analyzing the trends in fund duration. Some short duration funds may be able to deliver slightly higher returns. But that is usually at the cost of added interest rate risk. Funds that actively manage duration to generate the extra returns expose investors to heightened volatility or fluctuation in fund values.

Hence, as an investor, you need to take a call if the additional returns are worth and if it aligns with your risk profile.

• Relative returns

Always remember that numbers can hide more than they reveal. Hence, when looking at the performance of a fund, it is important to keep the following things in mind:

• It is necessary to look at the fund’s relative returns (against the market benchmark and peers) and not just the absolute numbers.

• The last year’s performance numbers are not enough to make a decision. Consistency of performance (or outperformance) is what makes a good fund.

• Mean rolling returns for the last three years will give you a fair idea about the fund’s true worth.

Top-performing short duration funds in India

Based on the above-mentioned parameters, these funds are the best choices for your short duration funds investment in India:

• IDFC All Seasons Bond Fund

• IDFC Bond Fund Short Term Plan

• HDFC Short Term Debt Fund

• Invesco India Short Term Fund

• SBI Short Term Debt Fund

Final Words

Debt fund benefits far outweigh the so-called limitation of lesser returns. Out of the sixteen variants in the debt category, short-duration funds are the apt choice for investors with a 1 to the 2-year investment horizon.