ITI Ultra Short Duration NFO: To focus on high accrual income

The fund looks to invest in issuers with a minimum short-term credit rating of ‘A1+’ and long-term rating of ‘AAA’ to ‘AA

Staff Writer   /   April 29, 2021

ITI Mutual Fund has launched its fourth debt fund offering titled ITI Ultra Short Duration Fund. This is an open-ended ultra-short term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 3 months to 6 months.

The investment aim of the scheme is to generate regular income and capital appreciation through investment in a portfolio of short-term debt & money market instruments. To know more, read on.

NFO period

April 19 to May 3

Fund type

Like any other ultra short duration fund, the new product is expected to offer relatively lower volatility compared to schemes having longer maturity.

In the debt risk matrix, ultra short duration funds are positioned between liquid funds and low duration funds.

Though investors target these funds for short-term parking of funds, investing for a holding period of over 3 years, gives an edge over conventional fixed income products due to the benefit of indexation with relatively low credit risk.

Do note that this category’s superior performance in the last one year also came on the back of low volatility and higher risk-adjusted returns.

Why invest now

First, high surplus liquidity is likely to remain because of accommodative stance by RBI, rising FPI flows and low credit-offtake keeping short-term rates benign.

Next, yields are relatively higher compared to traditional savings products.

Currently, high credit quality papers are having decent accruals with lower interest rate risk. Upward sloping yield curve will have faster roll-down benefits.

Fund key features

Liquidity – Majority of the ITI Ultra Short Duration portfolio comprises Certificate of Deposits, Commercial papers, T-Bills and Corporate Bonds which are highly liquid.

Stability – ITI Ultra Short Duration will focus on high accrual income by implementing a Buy and Hold Strategy

Credit quality – ITI Ultra Short Duration’s majority investment will be in AAA/ A1+ or equivalent rated securities; prefer good credit quality papers based on quantitative and qualitative filters

Style – The fund will have an active management style based on credit spread and interest rate outlook

Short term parking of funds – ITI Ultra Short Duration is ideal for investors looking to park their money for a shorter duration. No lock-in and no entry/exit load.

Investment framework

The fund’s investment team follows a process to spot mis-priced credit opportunities and enhance yield with controlled risks. The fund looks to invest in a portfolio mix of issuers with a minimum short-term credit rating of ‘A1+’ and long-term rating of ‘AAA’ to ‘AA.

ITI Ultra Short Duration may take tactical exposure to G-Secs/T-Bills. But note that the fund will maintain a minimum 10% in cash/ sovereign papers.

At present, the fund is targetting average maturity between 0.35-0.50 years. It will not invest in lower rated and illiquid papers.

Fund manager

Vikrant Mehta, Head – Fixed Income

Minimum investment amount

Rs 5,000/ and in multiples of Re. 1/ thereafter.

The fund could be useful for STPs (Systematic Transfer Plans).

Why invest in Ultra short term funds
Ultra short term funds are an alternative to Fixed Deposits from the point of view of returns and taxation. However, there can be rating risks if the underlying papers are not of good quality. Duration risks are low as the ultra short term papers invest in short term papers largely. So do due diligence before investing in an ultra short term fund.
There are 28 funds in the ultra short term funds category. They have been giving 4.5% returns average for one year and 5.5% for three years.

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