Nippon India Short Term Fund: A good debt fund in current economic conditions

What are Short Term Funds

Short term funds, also known as short duration funds, are debt mutual fund schemes which invest in debt and money market instruments such that the Macaulay Duration of the scheme is 1 to 3 years. Macaulay duration is the weighted average of the period the investor should remain invested in the security in order to have the present value of the cash flows (interest and principal payments) from the bond match the amount paid for the bond. Longer the maturity of a bond, longer is its Macaulay Duration. Macaulay Duration is directly related to interest rate risk of the scheme.

Suggested reading should you invest in short term funds?

Why invest in short term funds in the current economic environment?

• Short duration funds invest in debt and money market instruments of a certain maturity / duration profile and hold them the maturity


• Short duration funds accrue the coupons (interest paid by the bonds) – accrual strategy. In other words, the returns of short duration funds depend on the interest paid by of the underlying instruments. They do not aim to profit from price movements of bonds.


• Short duration funds invest in debt and money market instruments such that the duration of the scheme is 1 to 3 years. Therefore interest rate risk is moderately low compared to longer duration funds.


• In the current economic environment, with high inflation and continuing rate hikes by central banks, the yields of G-Secs with 3 year maturities is around 7.15% (source: worldgovernmentbonds.com). Credit spreads of AAA and AA+ rated corporate bonds are in 0.4- 1.5% (source: CRISIL).


• These yields are attractive over 2 – 3 years investment horizon compared to traditional fixed income investments e.g. bank fixed deposits (FDs), Government small savings schemes etc. Current FD interest rates of major public and private sector banks for 2 – 3 year investment tenures are in the range of 6.25 – 7%. You can get higher yields (adjusted for TER) by investing in short duration funds or short term debt funds and matching your investment tenure with the maturity profile of the scheme.


• Over 3 years plus investment tenures, you can also get the benefit of long term capital gains taxation of debt funds. While bank FD interest is taxed as per the income tax slab of the investor, long term capital gains in debt funds are taxed at 20% after allowing for indexation benefits.


• Over sufficiently long investment tenures, once we reach the end of the interest rate tightening cycle, you can also benefit from some price appreciation when interest rate starts coming down.

About Nippon India Short Term Fund

Nippon India Short Term Fund is a short duration fund was launched around 20 years back in December 2022. The scheme has Rs 5,584 crores of assets under management (AUM) and has an expense ratio of 1.16%. The scheme has given 7.64% CAGR returns since inception (Return as on Jan 13, 2023).

Nippon India Short Term Fund portfolio characteristics

• The average maturity of Nippon India Short Term Fund portfolio is 3 years and duration is 2.36 years. The scheme has moderately low to moderate interest rate risk.


• The yield to maturity (YTM) of Nippon India Short Term Fund is 7.66%. The YTM of the fund is quite attractive compared to prevailing bank FD interest rates


• Around 28% of the portfolio holdings is in sovereign papers (no credit risk). Another 58% is in AAA and A1+ rated papers. This implies that 86% of the portfolio is of very high credit quality. Another 11% of the portfolio is in AA rated papers, which is also high credit quality. Overall credit quality of the fund is quite high.


• Nippon India Short term fund manages risk prudently. The standard deviation of the fund’s returns is lower than the category average.

Why invest in Nippon India Short Term Fund?

• High inflation, hawkish commentary of the Fed and Dollar strengthening against the Rupee, short duration funds with accrual strategy may be suitable for investors with moderately low to moderate risk appetites.


• The current yield of Nippon India Short Term Fund is attractive compared to interest rates of traditional fixed income investments.


• Credit quality of Nippon India Short Term Fund is quite high.


• Nippon India Mutual Fund as an AMC has a strong performance track record in fixed income products.


• You should have minimum 2 – 3 years investment horizon for the fund. You can get benefit of long term capital gains taxation for investor tenures of over 3 years.

Investors should consult with their mutual fund distributors or financial advisors if Nippon India Short Term Fund is suitable for their investment needs.