In our article,Top 5 short term debt mutual funds in 2015, we had reviewed some of the best short term debt funds based on certain criteria. While short term debt funds are ideal for conservative investors looking for stable returns over a period of 1 to 2 years, credit opportunities funds offer investors to earn higher yields over a 2 to 3 year time period. These funds, sometimes also known as corporate bond funds, are similar to short term debt funds. The fund managers of credit opportunities funds lock in a few percentage points of additional yield by investing in slightly lower rated corporate bonds. Despite the slightly lower credit rating of the bonds in the credit opportunities fund portfolio compared to a say a short term debt fund portfolio, the overall credit quality of good credit opportunities funds is quite high. In fact, Securities Exchange Board of India has been reviewing norms of investment in corporate bonds by mutual funds since August 2015, when a particular Asset Management Company faced some issues with respect to downgrade of a corporate bond in its portfolio. In fact, a few days back SEBI tightened norms with respect to company and sector specific exposures of debt mutual funds. Birla Sun Life Short Term Opportunities Fund, however, has been one of the best performing credit opportunities fund, giving nearly double digit returns over the past three years.
The chart below shows the trailing annualized returns of Birla Sun Life Short Term Opportunities Fund and average category returns of Credit Opportunities Funds over 1 year, 2 years and 3 years investment tenures.
Source: Advisorkhoj Research and Moneycontrol.com
We can see that over a 2 to 3 year, investment horizon Birla Sun Life Short Term Opportunities Fund has been a clear outperformer. The chart below shows, the annual returns of Birla Sun Life Short Term Opportunities Fund since 2011. We can see that the over the past 5 years, this fund has given excellent returns almost every year.
Source: Advisorkhoj Research
The scheme was launched in May 2003 and has an AUM of nearly र 3,400 crores. The expense ratio of the fund is 1.28%. The minimum investment in this scheme is र 5,000. Sunaina Da Cunha and Kaustabh Gupta are the fund managers of this scheme. In addition to the usual growth and annual dividend options, the scheme also has a quarterly dividend option. CRISIL ranks this fund 1 and Morningstar has a 4 star rating for this fund.
To understand the risk return characteristics of Birla Sun Life Short Term Opportunities Fund, let us quickly recap two debt fund investment strategies that we have discussed several times earlier in our debt fund blogs.
Debt fund managers employ two different kinds of investment strategy:-
Let us understand the risks involved with debt investments. There are, primarily, two kinds of risks associated with debt funds:-
We should understand that, just because a bond’s credit rating is not AAA, it does not mean that it will default in interest or principal re-payment. AA rated bonds also offer high capital safety while giving a higher yield or interest. We should understand that credit risk should not be a concern for the investors in Birla Sun Life Short Term Opportunities Fund, since the 93% of the portfolio is invested in AAA or AA rated papers denoting high credit quality.
Yield to maturity (YTM) is the return which the debt fund will get by holding the securities in its portfolio to maturity. The YTM of the fund portfolio is 8.97% and the modified duration is 3.1 years. This implies that if there are no changes to the fund portfolio, it can give a return of 8.97% over the next few years before expenses. Investors investing in short term debt funds should try to match their investment horizon with the modified duration of the fund portfolio. If there is a big mismatch between the investment horizon of the investor and the modified duration of the fund portfolio, then the return expectation of the investor may not be met.
The company concentration risk of the fund is fairly well diversified. The top 5 corporate bond holdings in the portfolio account for 30% of the portfolio value. Government bonds account for about 27% of the portfolio. 8% of the portfolio is held in cash. SEBI has recently tightened the company and sector specific exposure norms. From a company concentration perspective there should be no impact of the revised norms on Birla Sun Life Short Term opportunities Fund. In terms of revised sector limits, like many debt funds, there may be a potential impact on the portfolio, particularly with respect to investment in NBFC bonds. Investors should bear this in mind when investing in the fund. The new SEBI norms are meant to strengthen the risk control mechanisms of the funds and are in the best interest of the investors. Therefore, overall this is a positive development.
Birla Sun Life Short Term Opportunities Fund, Quarterly Dividend Option, has an excellent Dividend payout rack record. The table below shows the quarterly dividend payout record of the fund over the past three years.
Source: Advisorkhoj Research Historical Dividends
Conclusion
Birla Sun Life Short Term Opportunities Fund is a great investment option for short and medium term investments. In light of the recent SEBI norms, investors should monitor the developments in the debt fund space and consult with their financial advisors if Birla Sun Life Short Term Opportunities Fund is best suited for their short and medium term investment needs.
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