Investors unquestionably gravitate towards fixed deposits when looking at investments over a few years. What many fail to realise is that short-term debt funds are an attractive avenue to park surplus cash over a 1-3 year horizon.
We present you with three Silver rated funds in this category that are worthy options for investors: Franklin India Corporate Bond Fund, Franklin India Income Opportunities Fund, and Franklin India Short Term Income Plan. On the face of it, it appears startling that three funds from a single fund house have all bagged the Silver rating. It was no prejudice on our part.
Getting down to brass tacks, there are many considerations to take into account to rank a fund above its peers. The one factor that stands out prominently is the investment team.
All three funds benefit from the presence of fund manager Santosh Kamath who is flanked by a skilled investment team of five. Over the years, this fixed income team has carved a niche for itself in the corporate debt segment and credit space and we rank it as one of the best in the industry. Given the fact that the investment strategy involves going down the credit ladder and investing in sub-AAA rated securities, the presence of the two credit analysts on the team is essential.
The team is cognizant of the risk involved in such an approach where a wrong bet can lead to significant underperformance. To mitigate this risk of an investment strategy rooted in credit bets, the team plies a research-intensive process involving rigorous qualitative and quantitative analysis to gauge the credit worthiness of companies. Kamath tends to steer clear of entities he views as offering a poor risk/reward trade-off. His approach is akin to a buy-and-hold one since he usually refrains from churning the portfolio frequently.
To control frequent outflows (or redemptions) from the funds, a high exit load is applied on redemptions in all the three funds. The period over which the exit load can be charged is largely in line with the maturity profile of the funds. This helps the manager and the investment team in taking investment decision without worrying too much about redemptions, ensuring the effectiveness of the buy-and-hold strategy.
The presence of an independent risk management team is essential in ensuring a robust investment process and handling downside risk. The investment team has to adhere to specific company, sector and issue specific limits when when constructing their portfolios.
Certain investors may frown upon the decision to charter into the territory of lower-rated securities, but they will have to concede that the investment strategy has been consistently plied and executed with a great degree of success so far. Looking at the pedigree of the fund house and the team, we believe it will continue to do so in the same vein going forward.
All three funds have delivered an impressive performance on the return as well as risk-adjusted returns front. We do agree that the performance track record of these funds under Kamath’s watch (April 2014 to October 2014) is extremely short. However, its past performance is still relevant given the fact that Kamath has always been actively involved in the decision-making process on these funds even when not actively hands on.
|
Short-term bonds funds with a Silver analyst rating
|
| Funds |
3-year return |
Peer group beaten |
Peer group beaten on MRAR front |
| Franklin India Corporate Bond Fund |
10.79
|
96
|
96
|
| Franklin India Income Opportunities Fund |
9.97
|
90
|
88
|
| Franklin India Short Term Income Plan |
10.03
|
92
|
92
|
| Peer group average |
9.27
|
|
|
All returns in percentage and as on October 31, 2014. In the case of Franklin India Corporate Bond, the return is calculated from its inception on November 30, 2011 / MRAR: Morningstar risk-adjusted return / Source: Morningstar Direct.
While the similarities in the funds are by now evident, where they do slightly stand apart from each other is in the average maturity of the portfolio. It is highest in Franklin India Corporate Bond Fund in the 2.5 - 3.5 year range and lowest in Franklin India Short Term Plan in the 1-2 year range.
So why have we not given the funds a Gold analyst rating?
The one area of concern is the expense ratio, or TER, which tends to be higher versus comparable peers. We would like to see the asset management company take constructive measures to lower the TER of its fixed income funds.
