SBI Magnum Low Duration: It rides out rate volatility - Buy

The short-duration debt fund has delivered 7.5-8.4% over three-, five- and seven-year periods

The RBI delivered in line with broad expectations and cut its policy repo rate once again by 25 bps to 6 per cent. However, the RBI did not change its stance from neutral to accommodative as was expected in the market, owing to uncertainty over future inflation trends and fiscal worries. The yield on 10-year G-Sec only inched up after the RBI’s policy.

Hence, if you are a conservative investor unwilling to take interest-rate risk, low-duration debt funds are a good choice. These funds invest in debt instruments such that the duration (Macaulay) of the portfolio is 6-12 months. This mitigates the rate risk and volatility in bond prices. While such debt funds may not deliver mouth-watering returns of 16-18 per cent in good years like-long duration gilt funds, stability in returns across cycles is a big draw for conservative investors.

SBI Magnum Low Duration (erstwhile SBI Ultra Short Term Debt) is a steady performer in this category. The fund has delivered 7.5-8.4 per cent over three-, five- and seven-year periods. Since its launch in 2007, the scheme has delivered an annualised return of 7.85 per cent.

Investors with a short — up to one-year — horizon can park surplus money in the fund.

Better than FDs?

For conservative investors, good-old bank deposits are always a go-to option. But for those looking to park money for 6-12 months, most banks offer 6.5-7 per cent. There are a handful banks, though, that do offer a higher 7.5-7.75 per cent for deposits of up to a year. But if you are willing to take some market risk, and liquidity is important to you, you can consider mutual funds, too, for parking your surplus.

Remember, in bank deposits, premature withdrawal attracts penalty, while in case of mutual funds, you can pull out money easily in case of exigencies. If you are parking money for less than a year, tax treatment is similar under both bank FDs and debt funds. In case of debt funds, short-term capital gains are taxed at your slab rate.

On returns, low-duration debt funds can also deliver higher returns of 8.5-9 per cent under favourable interest-rate environment, trumping your short-term bank deposits.

Hence, you can consider parking some surplus in such funds to earn higher returns.

SBI Magnum Low Duration has been a steady performer, delivering decent returns even in lacklustre years.

Fund performance

For instance, in 2015 and 2017, when long-duration gilt funds delivered modest 5 per cent and 2 per cent average returns, respectively, SBI Low Duration managed to post 8.6 per cent and 6.6 per cent returns, respectively, capping downsides.

This is because long-duration bonds are more sensitive to rate movements. While this helps long-duration debt funds deliver stellar returns in bond rallies, for investors looking at steady returns, low-duration bond funds are more suitable. Lower volatility in returns is usually paramount for investors looking for substitutes to bank deposits.

Credit risk is also lower in SBI Low Duration, which predominantly invests in higher-rated AAA and A1+ debt papers. As of February 2019, the fund invests 46 per cent in AAA rated debt instruments, 19.5 per cent in A1+ (short-term papers such as CPs and CDs) and 15 per cent in AA+ bonds.

The fund’s average maturity is about 0.5 years, and the current yield to maturity (YTM) is 7.9 per cent.

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