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No longer safe

Credit risks, which eroded the value of a short-term debt fund recently, revealed that the category isn't risk-proof. Investors need to be cautious

Short-term debt funds have traditionally offered a simpler alternative to conservative investors. With an average maturity of one to three years, and a focus on treasury bills and quality corporate bonds, they are supposed to offer a more reasonable balance between risk and return.

But the last one year has shown that investors need to navigate the short-term debt category carefully, too. With sharp credit downgrades in one of its bond holdings, JP Morgan Short Term Income Fund, which lost over 15 per cent in a single quarter, demonstrated that credit risks can lead to losses from this otherwise safe category.

No longer safe

While this episode has prompted most fund houses to curb credit risks and take a more conservative view of their portfolios, it has become important for investors in short-term funds to do some research on fund portfolios before buying them. In selecting the short-term debt funds we like, we have looked at five different criteria to shortlist funds - good five-year returns, low credit risks, low concentration, short portfolio maturity and a reasonable expense ratio.

No longer safe

Overall, the 43 funds that make up the short-term debt category have generated a 8.47 per cent return in the last three years, manage aggregate assets of ₹1,05,054 crore and had an average portfolio maturity of 2.2 years, though there were outliers. Expense ratios varied from a modest 0.15 per cent to 2.11 per cent a year.

In many cases, direct plans, with their lower expense ratios, have outperformed the regular plans.

We recommend the following short-term funds:

  1. Birla Sun Life Short Term Opportunities - Direct Plan
  2. HDFC Short Term Opportunities Fund
  3. Reliance Medium Term Fund
  4. Tata Short Term Bond Fund
  5. UTI ST Income Fund

Watch this space for other recommendations.