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How do I pick a high-quality short-duration debt fund?

Look at a fund over an entire market cycle, suggests Ashutosh Gupta

Value Research often suggests opting for high-quality short-duration debt funds to a fixed-income investor but how would one select a high- quality fund from the rest, as their credit quality looks quite similar on Value Research's website?
- Razia Khan

Well, that's a good question. Let me provide a bit of perspective there. So, if you look at this point in time, then yes, a lot of those funds would look pretty good or similar in terms of their credit quality. But I'm sure you would have heard the saying that the true character of a person is tested in bad times. Well, if that person happens to be an investment professional, I'd say it's the other way around. So, the true character of a fund is tested when it's easy to assume risk and easier to justify it.

One of the recent such phases came in around 2017 and early 2018. That's when you see a lot of differences in the risk levels in different portfolios. So, the broad point that I'm trying to make here is that rather than looking at fund portfolios at a particular point in time, an ideal approach is to look at the way the portfolios have been managed over at least one complete market cycle. And when you do that, you will realise the differences, the kind of investment discipline that a particular fund keeps during tough times and good times and the kind of risk that they assume at different points in time. Ideally, we, at Value Research, prefer the funds that do not deviate from their investment discipline even when the ability, as well as the temptation, to assume higher levels of risk is high. This is when the true character of a fund is revealed. That's why I say that you have to really look at a fund over an entire market cycle and that's what we try to do when we bring our analyst choice selection to you.