Short-Term Vs. Long-Term Debt Funds
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I invested in HSBC Income Fund - Short-Term Plan in March 2012. Should I hold the counter or invest in another debt fund to maximise my returns over the next year?
- Harish Panchal
HSBC Income Fund – Short-Term Plan is a short-term debt fund which is benchmarked to the CRISIL Short-Term Bond Fund Index. The fund aims to generate reasonable income through a diversified portfolio of fixed income securities. Over the last year, the fund has underperformed its category as shown in the chart below.
You could redeem your investment in HSBC Income Fund – STP and switch to another short-term debt fund. These funds are relatively more stable than their longer-duration counterparts. Additionally, long-term debt funds generally have high exit loads – sometimes more than a year. By investing in short-term funds, you may benefit from capital appreciation if interest rates fall.
The funds shown in the table below have consistently generated higher returns than HSBC Income Fund – STP, and are amongst the best performers in their category.
| Annualised Returns as on March 12, 2013 |
|---|
| Scheme Name | 1 Month | 3 Months | 6 Months | 9 Months | 1 Year |
|---|
| Birla SL Dynamic Bond Fund(G) | 7.9 | 9.65 | 9.75 | 10.03 | 10.44 |
| HSBC Income-STP(G) | 5.98 | 7.36 | 8.03 | 8.8 | 9.32 |
| ICICI Pru Short Term Plan(G) | 7.68 | 9.46 | 9.31 | 9.8 | 9.86 |
| IDFC SSIF-MT(G) | 7.28 | 9.34 | 9.4 | 9.78 | 10.09 |
| Templeton India Low Duration(G) | 8.84 | 8.46 | 8.8 | 9.3 | 9.98 |
| Templeton India ST Income (G) | 6.86 | 8.67 | 9.31 | 9.83 | 10.38 |
Templeton India Low Duration Fund is relatively conservative as it does not invest in government securities and aims to generate a regular income through investments in fixed income securities. The scheme usually maintains a low modified duration to minimise interest rate sensitivity while offering relatively higher accruals. Templeton India ST Income Plan (TISTIP) follows a similar strategy, but generally maintains a higher modified duration than TILDF.
If you have a slightly higher risk tolerance, then you could consider investing in aggressive short-term funds such as Birla Sun Life Dynamic Bond or IDFC SSIF-MT. These funds have generated higher returns than TILDF, but are relatively more volatile.
Birla Sun Life Dynamic Bond Fund is an actively managed scheme which aims to generate returns and capital appreciation through investments in bonds and government securities. The fund may also invest in structured credit instruments for higher interest income. A portion of the fund’s corpus is focused on generating returns through accrual income. The fund can invest up to 25 per cent in government securities for tactical exposure. IDFC SSIF-MT aims to generate stable returns through a mix of accrual income and capital appreciation. The fund’s exposure to government securities is limited to 25 per cent and the average portfolio maturity is capped at four years.
In conclusion, you will benefit from higher returns by redeeming your investment in HSBC Income STP and investing in top-performing short-term funds. If you are willing to extend your investment horizon to 18 months, then you can maximise returns through a diversified portfolio of short-term funds. You could invest a portion of your corpus in dynamic funds like Birla Dynamic Bond and IDFC SSIF-MT. The remainder can be invested in accrual-focused funds such as TILDF and TISTIP.
Remember that investments in debt funds will incur Dividend Distribution Tax (DDT) or Capital Gains Tax (CGT). Your tax liability will be determined by your tax slab, your holding period and the investment option that you choose. Your financial advisor can help you choose a tax-effective option and minimise your tax liability.