Tata Ultra Short-Term Fund: A Worthy Proposition For The Short-Term?
Jan 15, 2019

Author: Aditi Murkute

Tata Mutual Fund has begun the New Year by launching Tata Ultra Short-Term Fund (TUSTF) an open-ended debt mutual fund.

A Ultra-short-term funds invest in debt and money market instruments such that the Macaulay duration of the portfolio is between 3 months to 6 months.

The Macaulay Duration (named after Frederick Macaulay) is the weighted average term-to-maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price.

It is defined as the average time taken for an investor to receive all the cash flows (periodic interest as well as principal repayments) of a bond, weighted by the present value of each of the cash flows.

Compared to a liquid fund an ultra-short term fund invests in higher maturity debt papers and money market instruments.

Note that the bond prices are inversely related to the interest rates. Hence if a bond that has a longer maturity, is extremely price-sensitive to changes in the interest rate as compared to bonds having a short duration. An ultra-short-term fund help investor reduce this interest rate risks and offer better returns than most money market instruments.

As per the mandate, TUSTF will allocate all its assets in such instruments along with Commercial Paper, Certificate of Deposit, short term Deposit, convertible debentures, non-convertible debentures, Treasury Bills, short-term debt instruments, securitise debt, reverse repos in Government Securities etc. issued by various corporate, government - State and Central, Public Sector Undertakings (PSUs), etc. within the prescribed limits.

From the risk-return standpoint, TUSTF is a relatively moderately low risk-return. If you are planning for short-term goals, where say the money is required in 3 to 6 months, ultra-short term fund may be considered. The ideal time horizon to park money in an ultra-short term fund is 3 to 6 months.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

Table 1: NFO Details

Type An open-ended debt scheme Category Ultra-Short Duration Fund
Investment Objective To generate returns through investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months - 6 months

However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved. The scheme does not assure or guarantee any returns.
Min.Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Plans  • Direct
• Regular
Options

• Growth (default option)
• Dividend

  • Re-investment Facility (default option)

  • Pay-out Facility

Entry Load Not Applicable Exit Load Nil
Fund Manager Mr Akhil Mittal Benchmark Index CRISIL Ultra Short-Term Debt Index
Issue Opens 11 January, 2019 Issue Closes: 21 January, 2019
(Source: Scheme Information Document)

How will Tata Ultra Short-Term Fund allocate its assets?

Under normal circumstances, a portfolio of the scheme will have Macaulay Duration between 3 months to 6 months. And the scheme’s asset allocation pattern will be as under:

Table 2: TUSTF’s Asset Allocation

 
Instruments
Indicative allocations
(% of Total Assets)
Risk Profile
Minimum Maximum (Low/ Medium/ High)
Debt* and Money Market Instruments 0 100 Low to Medium

*Includes securitized debt (excluding foreign securitized debt) up to 70% of the net assets of the Scheme.

The Scheme shall not invest in foreign securitized debt and credit default swaps.

The net notional exposure (including long and short portion except hedge position) to derivatives will not exceed 50% of the net assets of the scheme. The scheme may also engage in short selling in fixed income derivatives.

The Scheme may invest upto 50% of its net assets in Derivatives.

(Source: Scheme Information Document)

Further, the Scheme Information Document states that:

  • i)  In absence of specific maturity date, next call date of Perpetual Debt Instrument (PDI) shall be considered for calculation of Yield to Maturity (YTM) and Macaulay Duration of the scheme portfolio.

  • ii)   For securities with put and call date, next put/call date shall be considered for calculation of Yield to Maturity (YTM) and Macaulay Duration of the scheme portfolio.

  • iii)   For securities with only call date, next call date shall be considered for calculation of Yield to Maturity (YTM) and Macaulay Duration of the scheme portfolio.

  • iv)   For securities with only call date, next call date shall be considered for calculation of Yield to Maturity (YTM) and Macaulay Duration of the scheme portfolio.

What will be the Investment Strategy?

To achieve the objective of generating regular income and capital appreciation, TUSTF will create a portfolio of short-term debt and money market instruments with relatively lower interest rate risk. The Scheme will maintain the Macaulay duration of the portfolio between 3 months and 6 months.

The fund manager will invest in those debt securities that are rated investment grade by credit rating agencies or in unrated debt securities, which the Investment Manager believes to be of equivalent quality. He will perform in-house research to emphasize on credit analysis, in order to determine the credit risk involved.

The investment process follows a top-down approach considering aspects like:

  • - Interest rate view;

  • - Term structure of interest rates;

  • - Systemic liquidity;

  • - RBI’s policy stance;

  • - Inflationary expectations;

  • - Government borrowing program;

  • - Fiscal deficit;

  • - Global interest rates;

  • - Currency movements, etc.

Further, the Scheme may use derivative instruments to hedge the risk of fluctuations in the value of the investment portfolio.

Who will manage the Tata Ultra Short-Term Fund?

Tata Ultra Short-Term Fund will be managed by Mr Akhil Mittal. He holds a bachelor’s degree in commerce (B. Com) and an MBA.

Mr Akhil Mittal is a Senior Fund Manager and is with the fund house since June 2014. Mr Mittal reports to Head-Fixed Income at Tata Asset Management Ltd.

Prior to joining Tata Mutual Fund, he’s worked as a Senior Fund Manager reporting to Head Fixed Income at Canara Robeco Asset Management Ltd. for four years, and prior that with Principal PNB Asset Management Co Ltd for few months. He’s worked as Senior Manager with Edelweiss Securities Ltd. from June 2006 to August 2008.

Currently at the Tata Mutual Fund , he manages Tata Treasury Advantage Fund, Tata Dynamic Bond Fund, Tata Income Fund, Tata Young Citizen Fund (Debt Portfolio), Tata Fixed Maturity Plan - Series 53 Scheme A, B, Tata Fixed Maturity Plan - Series 54 Scheme A, Tata Fixed Maturity Plan - Series 55 Scheme A, B, D, E, F, G, I, J, Tata Fixed Maturity Plan - Series 56 A, B, C, D, F.

The outlook for Tata Ultra Short-term Fund

The main risks with investments in debt securities are interest rate risk, credit risk and liquidity risk. Interest rate risk associated with debt instruments depends on the macroeconomic environment. It includes both market price changes due to change in yields as well as coupon reinvestment rate risk.

So, in the current context factors such inflation, the direction of policy rates, currency movement, fiscal deficit, and the consequent impact on yields, plus the ratings assigned to debt papers held in the portfolio, etc. are some of the factors that will weigh on the potential performance of TUSTF.

How the fund manager assesses these aspects while following a top-down approach in portfolio construction, remains to be seen. The fortune of TUSTF will be hinged on the portfolio construction activity and quality of debt papers and money market instruments it would hold in its portfolio.

Consider your risk appetite and time horizon before investing in TUSTF.

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