Franklin India Ultra Short Bond Fund Review: When and how to invest

Franklin India Ultra Short Bond Review Managing Credit Risk Efficiently

Published: October 5, 2019 at 12:05 pm

Last Updated on

Franklin India Ultra Short Bond Fund is one strange fund, some might even call special! About 80% of its portfolio has a credit rating lower than the highest and yet the fund has somehow managed to escape unscathed from major credit default events. How does it do it? What kind of investors should invest, when and how? Let us try and find out.

Let us first start with its name. Franklin India Ultra Short Bond Fund – Super Institutional Plan is fairly confusing. Retail investors can buy units of this fund with a minimum Rs. 10,000 investment or an Rs. 1000 SIP, When SEBI urged fund houses to merge retail and institutional plan, the fund house chose to stick with this plan.

The Average Assets under Management (AAUM) for the quarter of July – September 2019  for this fund makes interesting reading. The regular plan growth option accounts for 53.86% of the AUM, direct plan, growth 30.73%. About 8.5% of the AUM is in daily dividend option (regular), 3.8% weekly dividend (regular), 2% daily dividend direct and 0.8% weekly dividend direct. We will get back to the dividend business later.

When it comes to a debt fund, the investor should first look at the Yield to Maturity (YTM) of the fund, currently 9.71%. This is a measure of risk not return as incorrectly believed.

The definition of YTM – the return that the scheme will generate if all the securities in the portfolio are held until maturity and all interest payments are made in time – does not apply to an open-ended fund. The fund manager will buy and sell bonds constantly and the percentage allocation to the bonds will change when news bonds are added or sold or as per the in and outflow of money from the scheme. So do not assume you will get a return close to YTM. That is wrong.

When I see 1-2% more than current FD rates (for a few months) or significantly higher than category average YTM (7.8%), it sets off all kinds of alarm bells.

The fund has regularly returned at least 1.5% more than existing FD rates over the last few years (looking at annual returns) only because it holds risky bonds. It may seem counterintuitive at first. A borrower whose creditworthiness is less than perfect has to shell out more interest. But then again, will they able to pay that much interest as their ability is in question?!

So how does Franklin India Ultra Short Bond Fund manage? Primary risk management is from diversification. The fund holds 149 bonds as against the category average of 49 (source Value Research). Security selection is definitely important and they certainly have done a great job.

However, it is important, well, crucial to understand that this fund (or any fund) is not immune to credit risk just because it has, probably the best bond fund manager in the country – Santosh Kamath, Franklin India’s fixed income CIO.

Franklin India Ultra Short Bond Fund-Super Inst(G) Ratings Upgrade / Downgrade

The fund suffered six bond downgrades from Jul 2019 to Aug 2019. Six different downgrades from June to July 2019 another four different downgrades from May to June 2019! I am not making this up!! There were few credit rating upgrades too!

Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

Franklin India Ultra Short Term Bond Fund Ratings Upgrade or Downgrade HistorySo the fund management is not immune to credit risk. They have got it wrong several times. It is just that, so far there have been no defaults and the exposure of these downgraded bonds were low.

Wait a minute, if there were so many credit rating changes, why did I not see it in the NAV? Well, we did!  Consider the fund’s benchmarks: Crisil Liquid Fund Index and
Crisil 1 Year T-Bill Index. Both these are atrociously inappropriate considering the way the fund invests! Let us talk about that another day!

The fund’s beta is 1.84 wrt CRISIL Liquid index over the last three years. The interest rate associated bond yield changes and rating downgrades are responsible for this. This implies 84% higher volatility! So the risk is quite evident but one will have look more closely.

This is the portfolio rating history of Franklin India Ultra Short Fund.  It is dominated by AA and A rated bonds!

Rating history of Franklin India Ultra Short Bond FundNotice that the fund has increased its corporate bond holdings from late 2012.

Franklin Ultra Short Term Bond Type History

Expense Ratio History

The fund progressively increased its expense ratio (ER) for both regular and direct plans with an increase in AUM which is not quite inviting.  SEBI must do something about this immediately to stop frequent tinkering of the ER

Expense Ratio History of Franklin Ultra Short Term FundWho should invest?

Only investors who can stomach credit downgrades with a goal one year and above should invest. Do not invest by looking at past returns! (notice I never talked about it here) Do not invest by looking at star ratings! Do not assume the Franklin fund management can never get it wrong. Stay away if you prefer peace of mind.

This can be used for long term goals provided you have the confidence that the management will spring back.

How should we invest?

Choosing the growth option is always simple. The weekly dividend option is an option that those in the 30% slab can consider for less than 3Y investment duration. The dividend distribution tax is a touch better than “as per slab” taxation, but more importantly, the risk is considerably lower as the gains are preserved as dividends. The STCG  (or LTC) from the weekly dividend option will be close to zero or at least quite small.

Do share if you found this useful
Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books

You Can Be Rich Too with Goal-Based Investing

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

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

1 Comment

  1. A lot of the defaults in the last couple of years have been from companies that were rated AAA. However we have not seen defaults from companies rated AA

    This is another factor why this fund has avoided losses due to defaults

Leave a Reply

Your email address will not be published. Required fields are marked *