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Can I spend money on ICICI Prudential Brief Time period Fund for short-term targets?


A reader asks, “Sir, a buddy really useful ICICI Prudential Brief Time period Fund is an acceptable selection for my want which is three years away. The AMC web site says the fund can be utilized for durations above six months. Are you able to please let me know if that is true and if I can proceed with the funding?”

ICICI Prudential Brief Time period Fund is “an open-ended short-term debt scheme investing in devices such that the Macaulay period of the portfolio is between 1 Yr and three Years.”

What does this imply? If we contemplate the fund portfolio a composite bond, it is going to take wherever between 1 to three years to recoup your funding (on the value you bought). Learn extra: Why it’s essential fear about  period in case your mutual funds spend money on bonds.

This can be a crude definition and assumes the bond portfolio doesn’t change through the time you spend money on the fund, which is impractical. The weighted common tenure of the bonds within the portfolio will likely be greater than the Macaulay period. Typically will probably be just some months extra and generally a number of years extra.

The upper the Macaulay period and better the typical portfolio maturity greater would be the volatility within the NAV. The modified period is one other measure of NAV volatility (see the above hyperlink on period for a proof).

For instance, the present Macaulay period of the fund is about 2.3 years, whereas the typical portfolio maturity is about six years! As one can see from the chart under, the burden of long run bonds has elevated within the portfolio, however the Macaulay period remains to be low. It is because Macaulay period elements in curiosity funds made. So greater the tenure of the bond, the upper the distinction between bond tenure and Macaulay period. One can mess around with this bond period calculator to see how this works.

Maturity profile history of ICICI Prudential Short Term Fund
Maturity profile historical past of ICICI Prudential Brief Time period Fund

So we are able to solely perceive this in relative phrases. The present Macaulay period of ICICI Cash Market Fund is about 0.32 years, with a mean portfolio maturity of 0.34 years. The Modified Period is 0.3191 years. So we are able to anticipate ICICI Prudential Brief Time period Fund to be a bit extra risky than the Cash Market Fund.

Unstable right here means the fund will react strongly to bond market provide vs demand forces. Some individuals name this rate of interest threat. Whereas this isn’t totally incorrect, relying on macro-economic elements and particular circumstances, totally different bond market segments can have totally different shopping for vs promoting pressures.

We suggest buyers solely take a look at the typical portfolio maturity and never the Macaulay or Modified period for estimating NAV volatility.

Why? The present Macaulay period of ICICI Gilt Fund is about 1.9354 years, with a mean portfolio maturity of 10.13 years. The Modified period is 1.93 years. If we thought of the Macaulay or Modified durations, we is likely to be led to the wrong assumption that the gilt fund is at present as risky because the short-term fund.

The five-year rolling returns of the three funds are in contrast under. We will see that the short-term fund has volatility in between that of a gilt fund and a cash market fund.

5-year rolling returns comaprison of ICICI Prudential Short Term Fund vs ICICI Prudential Gilt Fund vs ICICI Prudential Money Market Fund
5-year rolling returns comparability of ICICI Prudential Brief Time period Fund vs ICICI Prudential Gilt Fund vs ICICI Prudential Cash Market Fund

To find out an appropriate period of funding, the Macaulay period can be utilized whether it is ruled by SEBI guidelines to be range-bound. On this case, it’s 1-3 years. So we suggest utilizing it for durations a lot greater than three years. No less than 5 years or extra, ideally six years or extra (2 x3 years).

For funds not ruled by range-bound Macaulay durations, e.g. liquid funds, company bond funds, gilt funds and so on., the typical portfolio maturity can be utilized to find out volatility and funding period.

Additionally, it should be stored in thoughts that ICICI Prudential Brief Time period Fund invests a good portion of its portfolio in company bonds. That is prone to credit standing downgrades and defaults. It is crucial to not be swayed by the dominant AAA score under. That’s topic to vary.

Credit standing historical past of ICICI Prudential Brief Time period Fund

Such a credit standing profile might solely be appropriate for knowledgeable buyers.

In abstract, by no means go by any AMCs advice of appropriate funding period.  Examine previous factsheets to seek out out the credit standing profile of the portfolio and its common maturity. In your want which is three years away, a cash market fund is extra appropriate than a short-term fund. For suggestions, see: Handpicked Checklist of Mutual Funds Jul-Sep 2022 (PlumbLine).

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