Several asset management companies, including ICICI Prudential AMC, Aditya Birla Sun Life AMC, Kotak Mahindra AMC, and Bandhan AMC, have recently introduced ultrashort-term debt index funds.
These funds follow the CRISIL-IBX Financial Services 3–6Months Debt Index. As per reports, the latest auction revealed that the cut-off yield for a 90-day treasury bill (T-bill) stood at 6.52%, while the 364-day T-bill yielded 6.47%.
Why Are These Funds Gaining Popularity?
Sarshendu Basu, Head of Products at Bandhan AMC, explains that investors today seek stability, liquidity, and reasonable returns amid interest rate fluctuations, inflation concerns, and global uncertainties.
In this scenario, short-duration debt instruments, particularly those maturing in three to six months, are appealing as they offer higher yields while reducing interest rate risks.
Kaustubh Gupta, Co-Head of Fixed Income at Aditya Birla Sun Life AMC, highlights that factors like consistent cash flow, potential interest rate cuts,
and possible shifts in monetary policy make the short end of the yield curve attractive. These index funds provide a unique blend of a roll-down strategy and exposure to financial services, ensuring both higher yields and liquidity.
What Do Ultrashort Passive Debt Funds Offer?
These passive debt funds mirror CRISIL’s index, consisting of AAA-rated instruments maturing in 3–6 months. Gupta points out that low costs, volatility-reducing roll-down benefits, and 100% exposure to AAA-rated bonds make these funds an attractive option.
Abhishek Bisen, Senior Executive Vice President and Fund Manager – Fixed Income at Kotak Mutual Fund, anticipates that the Reserve Bank of India (RBI) may increase liquidity
and cut the repo rate by 25-50 basis points in the next six months. This move could steepen the yield curve, enhancing returns for investors in these funds.
How Do These Funds Compare to Fixed Deposits (FDs)?
With a year-end credit demand-driven cash crunch pushing yields higher, Joydeep Sen, corporate trainer (debt) and author, explains that mutual funds are market-linked, meaning returns can fluctuate, whereas fixed deposits (FDs) offer predetermined returns.
Basu adds that the steepening yield curve in the 3–6 month segment presents an opportunity for investors to earn better returns compared to FDs of the same tenure.
Risks to Consider
These funds focus on high-quality bonds, reducing exposure to lower-rated but high-yielding instruments. However, Gupta warns that since the funds passively track an index, active management opportunities for maximizing returns are limited.
Another potential risk is sectoral concentration. Basu notes that since these funds mainly invest in the financial services sector, any challenges in this industry could increase risk. Additionally, tracking efficiency may be affected if certain securities are unavailable.
These schemes are not ideal for long-term fixed-income investment.
Who Should Invest in Ultrashort Passive Debt Funds?
With low default and interest rate risks, these funds are suitable for conservative investors with short-term financial goals. Sen suggests that investors needing quick access to funds should consider liquid or ultrashort-term funds.
Investors with a 3–6 month investment horizon can benefit from these funds. Bisen advises that those comfortable with 4–6 months of market volatility can consider investing.
However, investors with a very short-term goal of just 15–30 days should avoid these funds. It is also important to monitor tracking errors and fund expenses before investing.
