Fund Call: Aditya Birla Sun Life Savings Fund: A good alternative to bank deposits

This short-term income debt fund has delivered handsomely over the last decade

Bond investors may have little to cheer in 2018. After a tepid show in 2017 — when the yield on 10-year G-sec moved up by 80 basis points — uncertainty over inflation trends, worries on fiscal slippages, and tightening global liquidity will keep Indian bond markets on tenterhooks in 2018.

The spike in CPI inflation in November has dashed hopes of any rate cut by the RBI. Aside from the more-than-expected rise in vegetable prices, core inflation (excluding food and fuel) also moved up, driven by housing and increase in fuel prices.

Currently at 7.2 per cent, the yield on 10-year G-Sec should hover in a narrow band of 25-30 basis points, with more risk on the upside. This is not encouraging for bond investors.

But avoiding debt funds altogether may not be wise. Deposit rates have plummeted, and investors willing to take on some market risk can earn better returns by parking some money in some debt funds. Short-term income funds that carry less volatility in returns may be a good way to take some exposure in debt funds in the coming year.

Aditya Birla Sun Life Savings Fund, a short-term income debt fund, has delivered stable returns over the very long run — 8.5 per cent annual return over the last decade.

Over three- and five-year periods, the fund has delivered 8.5 per cent and 9 per cent return, respectively, making it a good alternative to bank deposits. Risk-averse investors, unwilling to take interest rate risk, could invest a portion of their fixed income investments in this fund.

Lower credit/rate risk

Short-term income funds invest in debt securities that mature up to 3-4 years. Their portfolios usually have a small allocation to long-term gilts and higher allocation to AAA-rated, medium-tenure, corporate bonds.

The average maturity for Aditya Birla Sun Life Savings Fund has been 1-1.5 years. This lowers the interest rate risk. This is because a higher maturity indicates higher sensitivity to rates and vice versa. The fund also predominantly invests in higher rated bonds, which mitigates credit risk.

Over the past three years, 65-70 per cent of the portfolio has been invested in either government securities, AAA or A1+ rated papers.

Hence investors wary of interest rate and credit risk could invest in the fund to earn stable returns with relatively lower volatility.

Currently the fund’s average maturity (as of November 2017) is 0.89 years. Given the sharp rise in bond yields recently and hardening of yields in the coming year, a low maturity will help cap downsides better.

The fund currently invests 58 per cent in AAA rated bonds, 24.9 per cent in AA rated and 4 per cent in government bonds.

Consistent returns

Birla Sun Life Savings Fund, on an average, has delivered 8.5-9 per cent returns annually over the long run — five to 10-year period. It has beaten category returns by 5-6 percentage points across time periods.

For investors looking to invest for less than three years, returns will be taxed at the income tax slab rates.

One has to keep in mind that while returns from short-term funds can vary with market, short-term funds with good track record have delivered returns in the 7-8 per cent range over the long run.

Birla Sun Life Savings Fund has delivered an annual return of 7.7 per cent return since inception.

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