Why Axis Short Term Fund is a good investment

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Stressing the need to support growth, the RBI kept the repo rate unchanged and maintained its accommodative stance during the August monetary policy review. At the same time, the RBI has also increased the amount of its VRR (variable reverse repo) auctions with the aim of normalizing liquidity and preventing short-term interest rates from falling.

However, the central bank stressed that this should not be interpreted as an abandonment of the accommodation. Additionally, given the focus on growth, the market expects repo rates to rise only in 2022 and not before.

With the future path of interest rates uncertain, those with a moderate risk appetite and an investment horizon of one to three years may consider investing in short-term funds.

These funds invest in debt and money market instruments such as corporate bonds, debentures, certificates of deposit (CDs), treasury bills (T-Bills) and government bonds, so that the Macaulay duration of the portfolio is 1 to 3 years.

The returns in this category may be more volatile than those of other shorter duration (or medium maturity) categories such as low duration funds and money market funds. But since they invest in debt securities with relatively longer maturities, the average returns may be higher.

Rise in the interest rate cycle

Those who invest in short-term funds stand to gain once the rate cycle begins, as these funds can then begin to invest in higher yielding debt securities. At the same time, compared to medium and long term funds, these schemes carry a lower interest rate risk. Thus, when interest rates rise, short-term funds, which hold relatively lower maturity debt securities, will be impacted to a lesser extent in the form of a fall in the price of bonds (capital loss). .

To play it safe on the credit risk front, only opt for programs with high credit quality portfolios. One of these programs is Axis Short Term Fund.

Performance comparison

Over the past seven years, the short-term fund category has generated average one-year and three-year rolling returns of 8.2% and 7.8% (CAGR) respectively. Compared to this, Axis Short Term Fund returned 8.9% and 8.5% in the respective periods. During this period, the plan had almost no instances of 1-year and 3-year returns (CAGR) below 5 percent. The diet’s standard deviation (SD) of 0.50 is consistent with many of its peers and lower than a few others. SD is an indicator of the volatility of plan returns. The higher the SD, the greater the volatility. So if a plan has a standard deviation of 0.5% and an average return of 8%, that means that the actual returns of the plan can range from 7.5% to 8.5%.

Only funds with a minimum history of seven years and assets under management (AUM) of at least 300 crore have been considered here. Axis Fund has been in existence since January 2010 and has assets under management of approximately 12,000 crore.

Portfolio details

Axis Short Term Fund follows a high quality low risk investment strategy. The program is currently invested in a mix of 1 year corporate bonds and money market instruments, as well as a portion in higher rated longer duration corporate bonds.

While shorter-dated debt securities should help limit interest rate risk, longer-term bonds can generate relatively better returns in today’s low interest rate environment.

At the end of July 2021, the plan’s portfolio had an average maturity of 2.90 years. A detailed breakdown by maturity shows that 27 percent and 39 percent of plan assets were debt securities with a residual maturity of up to one year and 1 to 3 years, respectively. Those that ripen later, that is, in 3 to 5 years and beyond, were 11% and 14% more, respectively.

In terms of credit quality, the safest sovereign and AAA-rated debt securities represented around 83% of the portfolio at the end of July 2021. 9% were AA + securities. Only a little over 1 percent was in AA debt securities and nothing in those rated below. Overall, also in the past, only a small proportion has been invested in papers rated below AA +.

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