A fund that endeavours to generate income and capital appreciation through investment in debt instruments and money market instruments by having a shorter-term investment horizon.

Summary

Type	An open-ended debt (income) scheme	Benchmark Index	CRISIL Short Term Bond Fund Index
Min. Investment:	For lump sum -> Rs 10,000 and in multiples of Rs 100 thereafter For Systematic Investment Plan (SIP)-> For Monthly option: Rs 1,000 per month for a minimum period of 6 months For Quarterly option: Rs 1,500 per quarter for a minimum period of 4 quarters	Min. Additional Investment:	Rs 1,000 and in multiples of Rs 100 thereafter
Face Value	Rs 10 per unit	Options offered:	Growth Option Dividend Option Bonus Option
Entry Load	Nil	Exit Load:	0.25% if the units are redeemed / switched out within 30 days from the date of allotment
Issue Opens	August 30, 2013	Issue Closes:	September 11, 2013
Expense ratio:	Upto 2.25%

 

Investment Objective*

The investment objective of the scheme is to seek to generate income and capital appreciation through investment in debt instruments and money market instruments and to achieve stable returns over shorter-term investment horizons.

*Source: Scheme Information Document

 

Is this fund for you?

IIFL Short Term Income Fund (ISTIF) is a debt oriented mutual fund scheme from the stable of IIFL Mutual Fund, which would be investing a dominant portion of its assets in money market and debt instruments (including floating rate debt instruments, securitized debt, mutual fund units of debt schemes) with a maturity profile of less than 3 years. Tapping opportunities in the longer end, ISTIF would also be investing a small portion in debt instruments with residual maturity of less than 5 years. ISTIF proposes to invest in a portfolio of high quality debt and money market instruments to generate stable risk-adjusted returns with a low risk strategy. While yields at present have mounted since June-end level (after the Reserve Bank of India's (RBI's) measures to contain the Indian rupee), thereby making the shorter end of the yield curve appear relatively attractive; the risk yet remains to longer maturity papers due to persistent weakness in the Indian rupee, widening CAD, fiscal deficit and slowdown in economic growth. Nonetheless as mentioned in the investment strategy, the investment manager will try to achieve optimal returns with a high credit quality portfolio.

So given the on-going volatility in the Indian debt market due to downbeat macroeconomic variables in play, ISTIF would be exposed to intermediate interest rate risk, although a dominant portion of its asset would be deployed in money market and debt instruments (including floating rate debt instruments, securitized debt, mutual fund units of debt schemes) with a residual maturity of less than 3 years.

Hence ISTIF would be suitable only for those investors who have a little high risk appetite and risk tolerance while investing in debt mutual fund schemes.
 

Portfolio & Investment Strategy

The AMC endeavours to follow a structured investment process in order to identify the best securities for investment and has developed an internal research framework for consistently examining all securities. The aim of the Investment Manager will be to achieve optimal returns with high credit quality portfolio. The actual percentage of investment in various fixed income securities will be decided after considering the:
 

• Prevailing market conditions;
• Macroeconomic environment (including interest rates and inflation);
• Performance of the corporate sector and general liquidity; and
• Other considerations in the economy and market
   

The Scheme endeavours to invest in debt securities of companies based on criteria such as sound professional management, sound track record, industry scenario, growth prospects, liquidity of the securities, amongst host of other aspects.

The AMC has also put in place a front office system for managing risk. It endeavours to identify and measure risk through various risk management tools such as portfolio analytics, risk ratios and average duration to analyse the same and prevent it. The portfolio construction of the scheme would seek to comprise of securities issued by the central and state government and also debt & money market instruments issued by corporates. In order to manage the credit and liquidity risk which may arise out of the debt securities issued by corporates the investment team will focus on choosing securities which have better liquidity and sound credit exposures.

The Fund Manager intends to take a view on the broad direction of the market including interest rate outlook. Using a bottom-up approach to assess the quality and liquidity of the security, the investment team shall evaluate the credit of each instrument before including it into the scheme portfolio. While monitoring the credit quality of the portfolio the following factors would be considered:
 

• Liquidity of instrument
• Credit rating of instrument
• Credit spread
• Issuer of instruments and sectors it belongs to
• Credit Quality as determined by analyzing its financial statements
• Aggregate Exposure to the issuer
• Exposure of other Funds
   

The scheme also aims to maintain and monitor the credit quality of the portfolio using in-house research capabilities and inputs from external sources such as independent credit rating agencies.

Broadly the portfolio of ISTIF would broadly include:
 

• Collateralized Borrowing and Lending Obligations (CBLO)
• Certificate of Deposits (CDs) of scheduled commercial banks and development financial institutions
• Commercial Papers (CPs)
• Repurchase Agreements (Repos)
• Reverse Repo
• Treasury Bills (T-Bills)
• Government Securities (G-secs) issued by both Central and State Governments
• Non-Convertible Debentures (NCDs) and bonds
• Floating rate debt instruments
• Pass Through Certificates (PTCs)
• Securitised assets
• Short term deposits of Scheduled Commercial Banks
   

Moreover, ISTIF may invest in derivatives instruments such as interest rate swaps, forward contracts for the purposes of hedging and portfolio balancing, i.e. taking interest rate calls or as may be permitted under the Regulations from time to time.

Speaking about the portfolio turnover, in the debt market as an when trading opportunities may arise due to changes in system liquidity, interest rate policy announced by RBI, shifts in the yield curve, credit rating changes or any other factors; the fund manager may take these opportunities to enhance the total return of the portfolio, which will result in increase in portfolio turnover. But the fund manager would endeavour to optimise portfolio turnover to maximize gains and minimize risks keeping in mind the cost associated with it.

Under normal circumstances the asset allocation pattern for the scheme will be as under:

 

Instruments	Indicative Allocation (% of Net Assets)		Risk Profile High/Medium/Low
	Minimum	Maximum
Money market and debt instruments with residual maturity less than 3 years (including floating rate debt instruments, securitized debt, mutual fund units of debt schemes)*	80	100	Low to Medium
Debt instruments with residual maturity less than 5 years (including floating rate debt instruments, government securities, corporate NCDs, securitized debt)*	0	20	Low to Medium

* Investments in securitized debt including Pass Through Certificates (PTCs) not to exceed 25% of the net assets of the Scheme as at the time of purchase. Investment in debt derivatives shall be up to 50% of the net assets of the Scheme. The Scheme would invest in securities with average residual maturity upto 3 years.
(Source: Scheme Information Document)  

By investing in the aforesaid debt and money markets instruments, ISTIF aims to stable returns over short term with a low risk strategy while maintaining liquidity through a portfolio comprising of debt and money market instruments and will benchmark its performance against the Crisil Short Term Bond Fund Index. Crisil Short Term Bond Fund Index is a realistic estimate to track the returns of a Short Term Fund at a particular return and risk level and hence is used as a benchmark by most market participants.

 

Fund Manager Profile

The fund will be managed by Mr. Rahul Aggarwal, who holds over 8 years' experience in the financial services industry and has to his credit a degree in Engineering (B.E.), and PGDM from the Indian Institute of Management Studies (IIM) Kolkata. Mr Aggarwal has experience in capital markets; especially fixed income, credit risk, trading and portfolio management amongst host of other related spheres. Prior to working with IIFL Mutual Fund, he was worked as an analyst with L&T Mutual Fund.

Apart from IIFL Short Term Income Fund, he is responsible for managing IIFL Fixed Maturity Plan Series 6 and IIFL Dynamic Bond Fund.

 

Fund Outlook

ISTIF has been launched at an opportune time when yields have mounted substantially since June-end level (after the RBI's measures to contain the Indian rupee), thereby making the shorter end of the yield curve appear relatively attractive. But the risk yet remains for longer maturity papers due to persistent weakness in the Indian rupee and other downbeat macroeconomic variables in play for the Indian debt market. You see the rupee has depreciated -20.2% since the beginning of the current calendar year and is a cause of concern for the central bank and Government in a scenario where the Current Account Deficit (CAD) is at a record high of 4.5% of GDP (at U.S. $87.8 billion), economic growth has slowed down. As rightly mentioned by RBI in its 1st quarter review of monetary policy 2012-13 that, India is currently caught in a classic 'impossible trinity' trilemma, where the risk emanates from external sector concerns, volatility in foreign exchange and CAD.

Hence the aforesaid backdrop poses to be challenge for ISTIF's portfolio construction exercise and the fortune of fund would be closely linked to how the fund manager reads these data points and plays the interest rate cycle well and evaluates yields curve analysis, although the fund manager for ISTIF will try to allocate assets of the scheme between various fixed income securities with the aim of achieving "optimal returns with a high credit quality portfolio".

 

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