NFO Review: Indiabulls Short Term Fund
Aug 24, 2013

Author: PersonalFN Content & Research Team

Indiabulls Short Term Fund

A fund that endeavours to generate stable returns over short-term with a low risk strategy while maintaining liquidity through a portfolio comprising of debt and money market instruments.

Summary

Type	An open-ended debt scheme	Benchmark Index	CRISIL Short Term Bond Fund Index
Min. Investment:	For lump sum -> Rs 5,000 and in multiples of Re 1 thereafter For Systematic Investment Plan (SIP) -> Rs 1,000 and in multiples of Re1 thereafter	Additional purchase:	Rs 1,000 and in multiples of Re 1 thereafter
Face Value	Rs 10 per unit	Options offered:	Growth Option Dividend 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 22, 2013	Issue Closes:	September 05, 2013

Investment Objective*

The scheme will endeavor to generate stable returns over short term with a low risk strategy while maintaining liquidity through a portfolio comprising of debt and money market instruments.

However, there can be no assurance that the investment objective of the Scheme will be achieved.

*Source: Scheme Information Document

Is this fund for you?

Indiabulls Short Term Fund (ISTF) is a debt oriented mutual fund scheme from the stable of Indiabulls Mutual Fund, which would be investing a dominant portion of its assets in money market and debt instruments (including Government securities) with a maturity profile of less than 3 years. Tapping opportunities in the longer end, ISTF would also be invest small portion in debt instruments with a maturity profile of 3 to 5 years. ISTF 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 fund manager of ISTF will try to allocate assets of the scheme between various fixed income securities with the objective of achieving "optimal risk-adjusted returns". So given the on-going volatility in the Indian debt market due to downbeat macroeconomic variables in play, the ISTF 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 Government securities) with a maturity profile of less than 3 years. Hence ISTF 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 fund manager of ISTF will try to allocate assets of the scheme between various fixed income securities with the objective of achieving "optimal risk-adjusted returns". And while building the portfolio, ISTF would do a thorough research on the following to decide on portfolio duration and credit exposures:

General macroeconomic condition;
Political environment;
Systemic liquidity;
Inflationary expectations;
Corporate performance; and
Other economic and market considerations

The portfolio construction would seek to play out the shape of the yield curve of different issuer classes. The fund manager will seek to look for investment opportunities at different maturities of the same yield curve (for e.g. the Government securities yield curve) as well as look at the differentiated levels of risk premium offered by the market to different class of issuers (for e.g. 2 year yields offered by a Government security, an NBFC and a manufacturing corporate).

While adopting a rigorous approach to credit evaluation, ISTF would essentially follow a bottom-up approach and include:

A study of the operative environment of the issue;
Past track record;
Future prospects; and
Short-term and long-term financial health of the issuer

Moreover, ISTF may also use derivative instruments such as interest rate swaps like Overnight Indexed Swaps (OIS), Forward Rate Agreements (FRAs), interest rate futures (as and when permitted) or such other derivative instruments as may be permitted under the applicable regulations. But derivative would be used only for the purpose of hedging, and portfolio balancing or such other purpose as may be permitted under the regulations and guidelines from time to time.

Broadly the portfolio of ISTF would include:

Collateralized Borrowing and Lending Obligations (CBLO)
Certificate of Deposits (CDs) of scheduled commercial banks and development financial institutions
Commercial Papers (CPs)
Repos in Corporate Debt Securities
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 instruments
Pass Through Certificates (PTCs)
Securitised assets
Debt derivatives

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
Instruments	Minimum	Maximum	Risk Profile High/Medium/Low
Money market instruments and debt Instruments including government securities, corporate debt, securitized debt*, repos in corporate debt securities and other debt instruments with maturity less than 3 years	80	100	Low to Medium
Money Market Instruments	0	20	Low to Medium

* securitized debt cumulative allocation not to exceed 50% of the net assets of the Scheme (No investment in
foreign securitized debt).
(Source: Scheme Information Document)

By investing in the aforesaid debt and money markets instruments, ISTF 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. Raju Sharma, who holds over 20 years' experience in the financial services industry and has to his credit a degree in commerce (B.Com), law (LLB) and is a Chartered Accountant (CA) from the Institute of Chartered Accountants of India (ICAI). Mr Sharma has exposure to fixed income management, investment banking and debt broking amongst host of other related spheres. Prior to working with Indiabulls Mutual Fund, he was worked as a senior fund manager and head cash & Hybrid Funds with Tata Asset Management Limited. Apart from Indiabulls Short Term Fund, he is responsible for managing Indiabulls liquid Fund, Indiabulls Ultra Short Term Fund and Indiabulls Income Fund.

Fund Outlook

ISTF has been launched at an opportune time when yields have mounted 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 -10.3% since the beginning of the current fiscal 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 a challenge for ISTF'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 ISTF will try to allocate assets of the scheme between various fixed income securities with the objective of achieving "optimal risk-adjusted returns".

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