For the better part of the decade leading up to 2020, most of Franklin Templeton’s debt funds were chart toppers across categories. Of course, in April 2020, all the good news faded with the forced winding up of six bond schemes – one of them being the top-deck performer ultra short bond fund.
The fund house has come out with a new ultra short duration scheme that is open for subscription till August 28.
A multiplicity of factors – moderating inflation (except for food articles), falling yields, likelihood of interest rate cuts over the next few quarters in the US and elsewhere, and a strong leash on domestic fiscal deficit – point to greater preference for long duration and gilt funds. However, with low credit risk and still reasonably attractive short-term yields, ultra short-term and money market funds are also finding favour.
With a new fixed income team headed by veteran Rahul Goswami, here’s what investors must know before considering the Franklin India Ultra Short Duration fund before considering exposure.
What’s the NFO about?
The new fund will invest in debt securities such that the portfolio’s Macaulay duration – a measure of bond price sensitivity to interest rate changes – is between three and six months.
Franklin India Ultra Short Duration fund will invest in bank bonds, treasury bills, corporate bonds, commercial papers and certificates of deposits among a few other instruments.
These are usually reasonably safe investments with almost no credit risk.
The RBI has been on pause mode since February 2023 and interest rates have mostly peaked out. Even as the US Federal Reserve considers rate cuts in the coming months, domestic g-sec yields have been coming down steadily over the past six months to a year due to a host of factors mentioned earlier and also due to the inclusion of Indian bonds in global indices.
Falling interest rate and yield scenarios favour long duration and gilt funds with longer term maturities as bond prices rally. Indeed, these categories of funds have given high single to double-digit returns in the last one year.
However, the shorter end of the curve though not as attractive as earlier still offers reasonable yields.
Data from Refinitiv and CCIL (compiled by Kotak MF) indicate that 3-month CPs and CDs are available with yields of 7.23 per cent and 7.35 per cent respectively as of August 20. One-year CPs and CDs carry yields of 7.62 per cent and 7.6 per cent respectively. These yields are still higher than those prevalent a year back.
In the ultra short duration space, yield to maturity of funds ranges from 7.2 per cent to 7.8 per cent, according to Valueresearch data.
What should investors do?
In the long run, quality ultra short duration funds have tended to beat inflation reasonably. But with indexation benefits gone and taxation pushed to slab rates for all debt funds, beating inflation on a post-tax basis may be challenging.
This category of funds can be useful as intermediary vehicles for systematic transfer plans to equity mutual funds. Such funds can also be used for parking a portion of your emergency funds along with money market schemes and bank/NBFC deposits.
On a rolling one-year basis from January 2013 to August 2024, the mean returns from the best of ultra short duration funds ha been in the 7-8 per cent range.
The ultra short term/ultra short duration funds from the houses of Nippon India, UTI and ICICI Prudential are among the best in the category and must be among your preferred choices.
With a new team in place, Franklin India Ultra Short Duration fund can still be considered for small lump-sums by investors willing to take modest risks.
