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Short-term debt funds: All's not lost

In spite of recent setbacks, short-term debt funds remain a good parking place for your one-year-plus money

Taking stock today, short-term income funds may not appear to be the most attractive category of debt funds to invest in. Falling interest rates for the last three years have resulted in much higher interest rates from medium/long-term gilt funds, income funds, credit-opportunities funds and other categories. Also, a few funds in this conservative category have taken exposure to lower-rated corporate debt and have suffered mark downs due to defaults and downgrades.

But despite all this, short-term income funds are a good parking ground for your one-year-plus money, especially if you don't like big year-to-year swings in your debt returns.

In this month's issue, we present short-term income funds selected not for their chart-topping returns but for their ability to finely balance risks with returns. We shortlisted these funds for their very conservative portfolios and low credit risk, their tight rein on portfolio duration and their ability to deliver good returns with relatively low expense ratios. We have also run the Altman-Z check on these funds. It helps determine the risk of bankruptcy (and hence default) in a company.

Short-term debt funds: All's not lost

Aggregate data show that short-term income funds managed one- and three-year returns of 9.12 and 8.99 per cent on an average as on June 30, 2017. This was for the regular plans. Direct plans, with their expense ratios 40-60 basis points lower, managed over 9.2 per cent. The total assets managed by the funds were at Rs 1.87 lakh crore and the funds maintained an average maturity of 2.71 years.

We recommend the following 6 funds:

Axis Short Term Fund

Birla Sun Life Short Term Fund

HDFC Short Term Opportunities Fund

ICICI Pru Ultra Short Term Fund

SBI Short Term Debt Fund

UTI Short Term Income Fund