Several asset management companies, including ICICI Prudential AMC, Aditya Birla Sun Life AMC, Kotak Mahindra AMC, and Bandhan AMC, have recently launched ultrashort-term debt index funds.
These funds follow the CRISIL-IBX Financial Services 3–6 Months Debt Index.
Recent reports indicate that the latest auction set the cut-off yield for a 90-day treasury bill (T-bill) at 6.52%, while the 364-day T-bill yielded 6.47%.
Why Are These Funds Becoming Popular?
Sarshendu Basu, Head of Products at Bandhan AMC, explains that investors today seek stability, liquidity,
and reasonable returns due to fluctuating interest rates, inflation concerns, and global uncertainties.
Short-duration debt instruments, especially those maturing in three to six months, are attractive because they offer higher yields while minimizing interest rate risks.
Kaustubh Gupta, Co-Head of Fixed Income at Aditya Birla Sun Life AMC, highlights that factors like steady cash flow, potential interest rate cuts,
and monetary policy shifts make short-term debt investments appealing.
These funds use a roll-down strategy while focusing on financial services, ensuring both higher yields and liquidity.
Benefits and Risks of Ultrashort Passive Debt Funds
These funds passively follow CRISIL’s index, consisting of AAA-rated bonds maturing in 3–6 months.
According to Gupta, their advantages include low costs, reduced volatility, and full exposure to high-quality bonds.
Abhishek Bisen, Senior Executive Vice President and Fund Manager at Kotak Mutual Fund, expects the Reserve Bank of India (RBI) to increase liquidity and reduce the repo rate by 25-50 basis points in the next six months. If this happens, the yield curve could steepen, leading to better returns for investors.
Comparing These Funds with Fixed Deposits (FDs)
Joydeep Sen, a corporate trainer in debt investments, explains that unlike FDs, which offer fixed returns, mutual fund returns depend on market conditions.
The current steepening yield curve in the 3–6 month segment creates an opportunity for better returns than FDs of similar tenure.
However, these funds have risks. Since they passively track an index, they lack active management to maximize returns.
Additionally, they mainly invest in the financial services sector, which could increase risk if the industry faces challenges.
Limited availability of certain securities may also impact tracking efficiency.
Who Should Invest?
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, but those with very short-term goals of 15–30 days should avoid them.
Bisen also advises monitoring tracking errors and fund expenses before investing.
