Short Term Debt |Short Duration Funds: Some Performers

short term debt funds

Short Term Debt Funds or Short Duration Schemes are a type of Debt mutual funds that aim at generating a more predictable income for investors by investing in bonds, corporate debentures, government securities, etc. In contrast to equity funds, Debt Funds are shielded from market fluctuations in Equity Stocks and carry lower risk even though the returns may vary depending on monetary policies of Government, Liquidity in Market and actual/anticipated changes in interest rate regime.

The uncertainty created by the IL&FS crisis in the bond market led to considerable turmoil in Money Market and showed that Debt funds, despite common perception are not totally risk-free. However these risks are much lower than funds with an equity component. Further the Risks can be lowered if one goes for Short Term Debt / Bond / Duration Funds.

The returns of a debt mutual fund comprises of –

  • Interest income
  • Capital appreciation / depreciation in the value of the fixed income security due to changes in interest rate scenario & other dynamics

In present interest rate scenario, it may make more sense to invest in
Short term debt funds ( Short Duration Schemes) as they can offer more predictable returns since they invest in securities with short tenors (lower maturity period) that undergo less changes in event of turn in interest rate cycle or other developments.

What are Short Term Debt / Short Duration Schemes

Debt funds are categorized on the basis of the type of debt securities they invest in. The distinction can be primarily on the basis of the tenor of the securities—short term or long term, and the issuer: government, corporate, PSUs and others. The risk and return of the securities will vary based on the tenor and issuer.

As per categorization done by SEBI, Short duration schemes are open-ended short term debt schemes that invest in debt and money market instruments with Macaulay duration between 1 year and 3 years. Macaulay duration is a measure of how long it takes for the price of a bond to be repaid by the cash flows from it. Macaulay duration  along with Modified Bond Duration are terms used to measure interest rate sensitivity of a fixed income security.

Why Invest in Short Term Debt/ Short Duration Funds

  • Short Term Debt Funds in many cases are able to offer a comparatively higher return as against a bank deposit. The return may range from anywhere between 6.5%-9.5%, depending on the assets in the short-term fund portfolio and dynamics of interest rate market.
  • Return in Short term Funds is generally lower than that from NCDs but NCDS suffer from considerable liquidity problems due to infrequent trading on the exchanges and there is more risk associated with one or few NCDS than with a Debt Mutual Funds which holds a basket of NCDs.
  • There is inverse relationship between rates (bond yields) and bond prices. When the interest rates go up, the prices of bonds fall. When prices of bonds fall, it brings down the NAV of debt mutual fund. The longer is the duration of a bond , more prone it is to to interest rates changes. So, debt mutual funds that invest in long-term bonds suffer the most when the interest rates start moving up but conversely benefit when the interest rates start moving down.  Since Short term debt schemes invest in securities with short tenors their underlying value is less affected by interest rate changes or other developments.
  • Mutual Funds inherently are better than Company FDs where there is a higher risk of delay or default in payment.
  • If seen purely from a risk averse point of view the Debt funds roughly in the descending order of risk are :
TTypeSecurity TypeSecurity Matuarity
Overnite FundsOvernite Bonds ~ 1 Day
Liquid FundsST Money Market < 91 Days
Ultra Short Term FundsDebt + Money Market3-6  Months
Low Duration FundsDebt + Money Market6-12 months
Money Market FundsMoney Market< 1 Year
Short Durtion FundsDebt + Money Market1-3 Years
Medum Duartion FundDebt3-4 Years
Medium to Long Duration Debt4-7 years
Long Duration FundDebt> 7 years

Thus Short Duration Funds / Short Term Debt Funds are placed in the middle and in in general while have more risk than Liquid funds etc, they are in mos of the times able to Return a higher Return. This will not be true if there is a significant increase in interest rates in a short period.

Besides the above indicated category of Debt Funds there are are other categories like Dynamic Debt Fund, Credit Risk Debt Fund, Corporate Bond Fund, Banking and PSU Fund, Gilt Fund which are not the focus in this post.
Floater Fund.

Comparison of few Short Term Funds with different Profiles

We are taking three funds which have done better than category average of short term funds, but are of different Sizes (AUM or Assets under Management) and different Composition of Portfolio by Credit Risks . These funds have performed well in their respective domains but it should not be construed that these funds are being recommended as other funds may have done equally well or even better considering the risk taken by the Fund Manager. All funds are Direct growth option which we consider good for investors unless one is very much particular to get periodic income.

These Short Term Debt / Short Duration Funds are

  1. Franklin India Short-term Income Plan Direct-Growth
  2. Baroda Short Term Bond Fund – Direct -Growth
  3. IDFC Short Term Bond Fund – Direct-Growth
ParticularsFI ST IncomeBP ST BondIDFC Bond-ST 
AUM in Rs. Crore11960.25196.424928.99
Expense Ratio0.79%0.69%0.27%
Exit Load0.50%  if < 1 Yr.25% if < 15 dNIL
 10% allowed  
RETURNS (Catg av)  
Returns 1m % ( .96)1.6711.08
Returns 3m % ( 2.49)42.73.09
Returns 6m % (3.65)5.884.364.54
Returns 1Yr % (6.17)9.667.977.17

Figures in ( ) indicate Average category Returns for Short Duration Funds. All three funds are placed higher than the average category returns in each of the periods.
Franklin India Short-term Income Plan has given the highest return over all periods. This is despite the fact that it also has a high expense ratio. This fund however has a higher exit load of .50% if redeemed in less than a year, which makes it slightly unsuitable for those with a shorter time horizon than one year.

IDFC Short term Bond Fund has low expense ratio and above average returns when compared to category average returns but lower than its peer Franklin fund. Baroda Pioneer Short Term Bond Fund too has
above average returns when compared to category average returns and has comparatively low Assets under management and this may be cause for slightly high expense ratio.

The reasons for this slight divergence in expense ratio and returns shall also become more clear when we examine the asset allocation and composition of portfolio of these funds in terms of credit risk.

Composition by Asset Class
Asset ClassFI ST IncomeBP ST BondIDFC Bond- ST 
Corporate Debt96.286.7434.05
Govt Bonds3.23.8554.3
Cash & Eqv0.69.4111.65

IDFC Short Term Bond Find has a high exposure to Govt Funds which have slightly lower return than corporate Bonds but are almost totally safe.

Composition by Risk 
RatingFI ST IncomeBP ST BondIDFC Bond- ST 

Franklin Prima Short Term income Fund has considerable exposure to A rated Bonds. Due to investment in these Bonds which offer higher yield, the fund has been able to offer Superior returns though it carries relatively some risk compared to other two funds.

Baroda Pioneer ST Bond Fund Portfolio comprise mostly of AA and AAA rated instruments which have lower yields than A rated Bonds but credit risk wise it has better profile than Franklin Prima Fund while delivering above average returns compared to category averages.

IDFC Short Term Bond fund which has high reliance on AAA rated Govt bonds has restricted itself to AAA rate corporate bonds as well . While the returns are lower than the Franklin Short Duration fund, and may slightly lag behind Baroda Pioneer fund in long run (see Portfolio yield in next para), it carries very low risk and this coupled with its low expense ratio, has still allowed it to perform better than the category Average.

Yield-to-Maturity (YTM) and Modified Duration are other two important yardsticks for evaluating a Debt Fund. Yield-to-Maturity (YTM) indicated the returns that the fund will generate if its underlying assets are held from current date until maturity. It factors all the interest/amounts received in this period.

Modified Duration is a measure of a fund’s sensitivity to interest rate changes. It is similar but a modified version of Macaulay duration discussed earlier in the post and additionally accounts for changing interest rates as well. Modified duration is calculated by dividing the Macaulay Duration by the portfolio yield. in Simple terms it measures the change in the value of a fixed income / Debt security that will result from a one per cent change in the interest rate. Macaulay Duration is of value to portfolio managers when they build/balance their fund portfolios, whereas modified duration is the preferable parameter for an investor to use while choosing his fund and assess its sensitivity to possible interest rate changes.

ParticularsFI ST IncomeBP ST BondIDFC Bond-ST 
Portfolio YTM(%) 11.19%9.8458.40%
Modified Duration2.07 yr.93 yr1.66 yr

Franklin India Short Term income Fund has the highest YTM followed by Baroda Pioneer ST Bond Fund and then IDFC Short Term Bond fund. This indicates the range of returns these funds can be expected to yield in the medium term ( minus expenses) under stable conditions and is in line with the composition of their respective portfolio. Baroda Pioneer ST Bond Fund due to low Modified duration is likely to see a lower impact of interest rate changes followed by IDFC Short Term Bond fund and then Franklin India Short Term income Fund. Modified duration or for that matter Macaulay duration of a fund is decided by Fund managers based on their sense of anticipated trends in interest rates. A higher duration means that Find manager does not anticipate Interest rates to go up.


  • Yield is not the only statistic for debt funds but Average Duration of Fund portfolio and Credit risk also needs to be taken into account.
  • Different Investors may have different preferences depending on their financial position and risk taking appetite.
  • FMPs (Fixed Matuarity Plans), a category of closed end Mutual Funds, are better placed than Short Duration Funds or even other Debt Funds for those aiming to derive tax advantage through Debt funds by holding them for more than three years.
  • The three Short Terms funds stack as follows in terms of Returns and Risk
ParameterFI ST IncomeBP ST BondIDFC Bond- ST 
ReturnHighAbove AvgAvg- Above Avg
RiskAbove AvgAvgBelow Avg (Low)
  • IDFC Short Term Bond fund appears suitable for conservative investors who want to take minimum risk by still want Returns and liquidity better than bank FDs.
  • Baroda Pioneer ST Bond Fund lies in the middle and in medium term could give slightly better returns than IDFC Short Term Bond fund due to its portfolio composition. It carries some more element of risk than its peer IDFC fund but is safer than Franklin Prima Short Term income Fund
  • Franklin India Short Term income Fund is the top performer with highest return but at an additional risk than other two funds. Those with some risk appetite and seeking higher returns may find it suitable.
  • Short Term Mutual Funds have good potential to offer a comparatively higher return as against a bank fixed deposit. The return could range between 7%-9.5%, depending on assets in the short-term fund portfolio and the interest curve. Taking into consideration various befits like No TDS, applicability of Tax only when redeemed and ability to defer tax to next financial year where needed, Short duration Debt funds merit a consideration in one’s investment portfolio

Standard disclaimer:  I am not a SEBI registered analyst and above analysis is for educational purpose only. Iam Certified in NISM-Series-V-A: Mutual Fund Distributors Certification Examination  but not involved in selling of any mutual fund products. I may have bias/vested interest in covered Stock/Funds/NCD etc. due to my own investment or  leaning. Further my understanding of the areas on which I write may be imperfect or incomplete. Please do your own due diligence as stock market/MF investments have high degree of inherent risk.

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