Investments can be considered in units of UTI Short-term Income Fund. The fund is among the top performers in the short-term income fund category. It delivered a compounded annual return of 8.3 per cent and 8.4 per cent over three- and five-year periods. During the same time, its benchmark, CRISIL Short-term Bond Fund Index, returned 6.2 per cent and 7.4 per cent annually.

UTI Short-term Income has also delivered better returns than the income fund (long-term) category average over three-, five- and seven-year periods. This suggests that it has managed to perform well across interest rate cycles, despite its short-term mandate.

The fund focuses on short-term investments in corporate and government bonds. It can hold a portfolio with an average maturity of up to four years.

Strategy

Typically, when interest rates hit the roof, investors are advised to move to long-term debt options. While there are signs that interest rates will gradually come off their highs, you can still bet on short-term funds for the following reason: Given that interest rates are unlikely to be cut drastically, long-term yields may not fall as sharply as in early 2009. Besides, yields of short-term bonds are expected to fall more than long-term bonds when interest rates decline this time; the current yields of short-term bonds (1-3 years) are slightly higher than long-term corporate bonds (more than 5 years). This means the scope for capital gains is higher in short-term bonds than in longer-term bonds when interest rates fall.

Secondly, the current yields on 2-3 year triple-A rated bonds are in the range of 9.5 per cent. Even if there are rate cuts to the tune of 50-100 basis points, coupon rates could still be close to 8.5-9 per cent on these instruments that UTI Short-term Income would typically hold. That still makes for decent returns, especially as inflation moderates.

Investors with a two-year investment horizon can, therefore, invest in this fund.

Performance and portfolio

With interest rates hardening over the last few months, the one-year return of the fund is close to 10 per cent as against short-term income fund category average of 9.1 per cent. The fund managed this performance without shifting to an easier investment route — money market instruments — where the rates are currently higher than long-term bonds.

The fund maintained average maturity in the range of 1.5-2.5 years over the last one year. The portfolio is actively managed as evidenced by average maturity varying significantly every month. That investors have been frequently exiting or entering this fund also calls for such active management.

The fund, for brief periods in 2008 and 2009, underperformed its benchmark as it shifted too quickly to short-term instruments in 2009. This didn't allow it to take advantage of the steep decline in long-term interest rates that triggered a rally in long-term bonds. Therefore, even as the fund delivered average annual return in excess of 8 per cent in early 2009 (on a rolling basis) it fell short of benchmark returns.

Still, on a rolling return basis, the fund has outperformed its benchmark 77 per cent of the time in the last five years.

The December-end portfolio of UTI Short-term Income has 57 per cent exposure to debentures and 36 per cent to certificate of deposits. Much of the portfolio is invested in banks and financial companies. The fund has an exit load for pre-mature withdrawal made within 180 days of investment.

Related Topics
comment COMMENT NOW