At its August meeting, the Monetary Policy Committee of the Reserve Bank of India (RBI) decided to maintain the repo rate at 5.5 per cent and kept its neutral stance unchanged. While there has been some easing in inflation, the RBI refrained from further reducing rates, citing the need for continued transmission of prior rate cuts and a cautious approach due to ongoing global and domestic uncertainties. This decision suggests that most of the rate cuts in the current cycle are likely done, limiting potential gains from long-duration bonds. In such a scenario — marked by stable interest rates — shorter-duration and accrual-focused fixed income strategies are better poised to generate returns with low volatility.
In the short-duration fund segment, those that adopt an active duration management approach and selectively take exposure to slightly lower-rated credit (such as AA-rated instruments) tend to perform relatively well. Axis Short Duration Fund (ASDF) stands out as an example of this approach. Since its inception in January 2013, the fund has delivered an annualised return of 8.3 per cent. The fund’s core strategy revolves around keeping the portfolio’s Macaulay duration between one to three years, as mandated by the category, while tactically navigating interest rate cycles and liquidity conditions.
Active duration
ASDF has been among the top-performing funds over the past two years, particularly in terms of one-year returns. Two strategic levers contributed to this performance. First, the fund manager adopted a top-down macroeconomic approach, making timely and active shifts between corporate bonds, government securities, and money market instruments to align with changing interest rate dynamics. Second, the fund made early duration extensions during the easing cycle, the narrowing of spreads in the AA-rated segment, and a timely reduction in maturity to focus on the more favourable two-to-five-year maturity bracket.
Notably, the fund was one of the few in its category to extend its average maturity to three years as early as February 2023 in anticipation of falling interest rates. By comparison, most peers took another four months to reach similar maturity levels. Also, in the current scenario wherein the rate environment became more accommodative and short-term yields attractive, the fund proactively reduced its average maturity from 3.8 years in April 2025 to 2.7 years by July 2025. In contrast, the average maturity of the overall short-duration fund category stood at 3.3 years, showcasing ASDF’s agility in seizing short-term opportunities.
Allocation to AA papers
Credit quality positioning has also been a significant contributor to the fund’s performance. ASDF typically follows an 80:20 allocation strategy, with 80 per cent invested in AAA-rated instruments and the remaining 20 per cent in AA-rated papers. This exposure to AA-rated bonds boosts accrual income without significantly compromising credit quality. Latest data show the fund’s exposure to AA-rated papers stood at around 13 per cent, above the category average of 7 per cent. Among the notable AA-rated holdings are bonds issued by Godrej Seeds & Genetics and Jubilant Beverages, while its AA+ investments include instruments from Godrej Industries, Muthoot Finance, Shriram Finance, and Tata Realty & Infrastructure.
Importantly, ASDF has maintained a clean credit track record, barring a minor 0.4 per cent exposure to Dewan Housing Finance Corporation during the 2019 bond crisis. The fund has since recovered the entire amount. The current corporate bond allocation is focused mainly on two-to-five-year papers issued by non-banking financial companies (NBFCs) and housing finance companies (HFCs). Government securities allocation has ranged between 2 per cent and 14 per cent in the last five years, reflecting a conservative and tactical approach to duration management.
Performance
From a performance standpoint, ASDF has consistently ranked in the top two quartiles across most time periods over the past seven years. During this period, it delivered top-two-quartile one-year returns in 82 per cent of all rolling periods. A five-year rolling return analysis over the last decade shows the fund generated an average annualised return of 7 per cent, compared to the category average of 6.2 per cent. The fund’s returns ranged between 6 per cent and 8.4 per cent during this time.
As of July 31, 2025, the fund’s debt portfolio carried a yield to maturity (YTM) of 6.8 per cent, slightly above the category average of 6.7 per cent. The expense ratio for the regular plan stood at 0.9 per cent, lower than the peer average of 0.98 per cent. For the direct plan, the ratio was 0.37 per cent — just above the category’s average of 0.36 per cent.
Published on August 9, 2025
