• Ankur Kapur, CFA, CFP

HDFC Short Term Debt Fund – Growth

Updated: Jun 22

Short Duration debt funds usually have a duration of 1 – 3 years. Theoretically, you can expect to earn higher returns than a fixed deposit with a bank, but the underlying investments are the key. Unlike, a fixed deposit, there is no guarantee of return.

Expense ratio: 0.19%

AuM: Rs 11,000 crores


The investments are made in a combination of corporate debt and government debt. Quality of the underlying is critical when you decide to invest in a short-term debt fund. The percentage of corporate debt and the associated quality needs to be understood in detail.

As a category, these funds are suitable for safety and not for wealth creation.


Taxation

Capital gain

If the redemption is placed within 3 years from the date of investment, gains will be included as part of investor’s income and tax is required to be paid as per the investor’s tax slab.

If the redemption is placed after 3 years from the date of investment, gains will be taxed at 20% after indexation.

Dividends

Dividends declared by the fund is included as part of the investor’s income and tax is paid as per the investor’s tax slab.

Mutual fund return (25th May 2020)

The recent reduction in RBI rate had a positive impact on the return.

During the month of March 2020, there was a sudden fall in the NAV because of G-Sec yields shot up due to Coronavirus fear. However, as RBI took action of reducing the interest rate, NAV recovered.

Modified Duration 2.60 years

Average Maturity 3.36 years

Yield to Maturity 7.81 %

Modified duration of a bond fund is represents change in the value of a security in response to a change in interest rates.

Average Maturity is the weighted average of all the current maturities of the debt securities held in the fund.

Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures.

Holding (%)

AAA 76.46%

AA 12.59%

Cash 4.84%

Government 4.26%

A+ 1.27%

A & Below 0.58%

A lot of debt funds are hit by illiquidity issues related A+ & below credit rating bonds. HDFC Short Term fund holds ~2% in that category. Even if we assume that the entire A+ & below credit rating bonds default, you will lose 2% and the 1 year return will go to 9%.

However, credit downgrade risk continues in this fund. This means that if credit rating is reduced, NAV needs to be marked down. However, government has cleared Rs 30,000 crore special liquidity scheme for stressed NBFCs and housing finance companies. The probability of default is quite low now.

So far, HDFC Short Term Debt Fund has sailed through the credit crisis storm quite comfortably. However, any credit downgrade event may cause decline in the NAV.


Investment in HDFC Short Term Debt Fund is not the most conservative style. However, if you are willing to accept a probability event of a credit downgrade, HDFC Short Term Debt Fund can provide a good return.

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