Can I invest in ICICI Prudential Short Term Fund for short-term goals?

Published: August 3, 2022 at 6:00 am

A reader asks, “Sir, a friend recommended ICICI Prudential Short Term Fund is a suitable choice for my need which is three years away. The AMC website says the fund can be used for durations above six months. Can you please let me know if this is true and if I can proceed with the investment?”

ICICI Prudential Short Term Fund is “an open-ended short-term debt scheme investing in instruments such that the Macaulay duration of the portfolio is between 1 Year and 3 Years.”

What does this mean? If we consider the fund portfolio a composite bond, it will take anywhere between 1 to 3 years to recoup your investment (at the price you purchased). Read more: Why you need to worry about  duration if your mutual funds invest in bonds.

This is a crude definition and assumes the bond portfolio does not change during the time you invest in the fund, which is impractical. The weighted average tenure of the bonds in the portfolio will be higher than the Macaulay duration. Sometimes it will be just a few months more and sometimes several years more.

The higher the Macaulay duration and higher the average portfolio maturity higher will be the volatility in the NAV. The modified duration is another measure of NAV volatility (see the above link on duration for an explanation).

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

    🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

    For example, the current Macaulay duration of the fund is about 2.3 years, while the average portfolio maturity is about six years! As one can see from the chart below, the weight of long term bonds has increased in the portfolio, but the Macaulay duration is still low. This is because Macaulay duration factors in interest payments made. So higher the tenure of the bond, the higher the difference between bond tenure and Macaulay duration. One can play around with this bond duration calculator to see how this works.

    Maturity profile history of ICICI Prudential Short Term Fund
    Maturity profile history of ICICI Prudential Short Term Fund

    So we can only understand this in relative terms. The current Macaulay duration of ICICI Money Market Fund is about 0.32 years, with an average portfolio maturity of 0.34 years. The Modified Duration is 0.3191 years. So we can expect ICICI Prudential Short Term Fund to be a bit more volatile than the Money Market Fund.

    Volatile here means the fund will react strongly to bond market supply vs demand forces. Some people call this interest rate risk. While this is not entirely incorrect, depending on macro-economic factors and special circumstances, different bond market segments will have different buying vs selling pressures.

    We recommend investors only look at the average portfolio maturity and not the Macaulay or Modified duration for estimating NAV volatility.

    Why? The current Macaulay duration of ICICI Gilt Fund is about 1.9354 years, with an average portfolio maturity of 10.13 years. The Modified duration is 1.93 years. If we considered the Macaulay or Modified durations, we might be led to the incorrect assumption that the gilt fund is currently as volatile as the short-term fund.

    The five-year rolling returns of the three funds are compared below. We can see that the short-term fund has volatility in between that of a gilt fund and a money 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 comparison of ICICI Prudential Short Term Fund vs ICICI Prudential Gilt Fund vs ICICI Prudential Money Market Fund

    To determine a suitable duration of investment, the Macaulay duration can be used if it is governed by SEBI rules to be range-bound. In this case, it is 1-3 years. So we recommend using it for durations much higher than three years. At least five years or more, preferably six years or more (2 x3 years).

    For funds not governed by range-bound Macaulay durations, e.g. liquid funds, corporate bond funds, gilt funds etc., the average portfolio maturity can be used to determine volatility and investment duration.

    Also, it must be kept in mind that ICICI Prudential Short Term Fund invests a significant portion of its portfolio in corporate bonds. This is susceptible to credit rating downgrades and defaults. It is important not to be swayed by the dominant AAA rating below. That is subject to change.

    Credit rating history of ICICI Prudential Short Term Fund
    Credit rating history of ICICI Prudential Short Term Fund

    Such a credit rating profile may only be suitable for experienced investors.

    In summary, never go by any AMCs recommendation of suitable investment duration.  Study past factsheets to find out the credit rating profile of the portfolio and its average maturity. For your need which is three years away, a money market fund is more suitable than a short-term fund. For recommendations, see: Handpicked List of Mutual Funds Jul-Sep 2022 (PlumbLine).

    Do share this article with your friends using the buttons below.

    🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
    Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
    New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
    • Follow us on Google News.
    • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
    • Join our YouTube Community and explore more than 1000 videos!
    • Have a question? Subscribe to our newsletter with this form.
    • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

    Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

      Explore the site! Search among our 2000+ articles for information and insight!

      About The Author

      Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
      Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
      Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
      Our new book for kids: “Chinchu gets a superpower!” is now available!
      Both boy and girl version covers of Chinchu gets a superpower
      Both boy and girl version covers of Chinchu gets a superpower.
      Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
      Feedback from a young reader after reading Chinchu gets a Superpower (small version)
      Feedback from a young reader after reading Chinchu gets a Superpower!
      Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
      Buy the book: Chinchu gets a superpower for your child!
      How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
      Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
      We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
      About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
      Connect with us on social media
      Our publications

      You Can Be Rich Too with Goal-Based Investing

      You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
      Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

      Your Ultimate Guide to Travel

      Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)