Reader Analysis: How I Selected My first Debt Mutual Fund

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Anirban Ghosh had posted his analysis of a debt mutual fund at Facebook Group, Asan Ideas for Wealth (AIFW). When I requested him to write an account of how he selected his first debt mutual fund, he readily agreed.  Anirban’s data crunching has unearthed an interesting mutual fund with a curious strategy and is the main reason for my request.

Before we begin, I would like to point out that,

1: the debt mutual funds mentioned in the post should not be treated as recommendations.

2: Although credit risk is an important factor in mutual fund selection, choosing a fund holding only AAA bonds is NOT the remedy. Those bonds can degrade at any time resulting in a NAV fall: Understanding Credit Rating Risk in Debt Mutual Funds. Therefore, unless a fund invests only in government securities, some amount of credit risk is always there. Even sovereign securities can fail ( we came close to this in the early 90s – which is why PPF rate was 12%). Remember 2008: credit ratings are mere “opinions” and they often change after the negative development.

3: You will see some notes by me below preceded with a “pattu:”

4: I have no opinion on external links mentioned below as I have not read them.

5: Investors wanting to learn more about debt mutual funds can consider downloading the Free E-book: A Beginner’s Guide To Investing in Debt Mutual Funds.

5: Despite these caveats, I appreciate Anirban’s desire to dig deeper. Without this, one cannot, well, one should not be a DIY investor  – it is, dig it yourself after all 🙂


At the outset, let me spell it out that I am an absolute novice when it comes to investing in Mutual Funds – of any kind. So the following commentary should not be taken as any sort of investment recommendation.
I have been an avid follower of freefincal for the past 2 years or so and must confess that I really like the objective approach Pattu takes in analyzing Mutual Funds. I quite like the graphs too and the various inferences one can draw from them. Much of what I have been learning about Mutual Funds is courtesy of his posts. One such post is How and When To Select Ultra Short Term Debt Mutual Funds. It inspired me to try my hand at shortlisting and analyzing (for the first time!) Mutual Funds on my own. What follows hereafter is an account of that effort. But before jumping into it, let me acknowledge another source that has helped me immensely in this exercise: an excellent series of posts about Debt Funds by Arun in his curiously named blog The Eighty Twenty Investor.
The Shortlisting
The method I ended up following was actually a mix & match of approaches outlined by Pattu and Arun. And I used Value Research for it.
  • I started off with my biases about AMCs. Wanted to select an Ultra Short Term (UST) Debt Fund only from these fund houses:

Then I applied 5 filters (Why? That is explained in much detail in the two posts hyperlinked above):

  • Only Regular Funds (to keep things simple) Pattu: and only for analysis!
  • Average Maturity between 0.25 and 1 (i.e., more than 3 months but less than 1 year) Pattu: This depends on the need. If my investment horizon is only a couple of month, I will stick to liquid funds. If is above that and I am new to debt funds, I will keep avg maturity below 1Y
  • Average Credit Quality = AAA
  • Equity Fund Style such that Credit Quality = High & Interest Rate Sensitivity = Low
  • Net Assets more than 1000 Crore.  Pattu: This is a thumb rule (not mine, and I don’t believe in it) to avoid liquidity problems when the NAV dips for any reason. AMC biases will often take care of this!
This gave me a short list of (thankfully) just two funds.  Pattu:  This depends on when and how you “look”!
The Analysis
For analyzing these two funds, I referred to their Scheme Information Documents (SID) and Monthly Factsheets. These documents are available in the respective AMC websites – Axis and IDFC.
Pattu: Now, this bit I love. This is what each investor should be doing BEFORE they invest in any mutual fund, especially debt mutual funds.
Axis Treasury Advantage Fund
From the SID:
The highlighted part (in yellow) i.e., “marginally higher maturity as compared to a liquid fund” tells me that it intends to invest in instruments with over 90 days of maturity, which is expected since it is a UST fund. But “marginally” is not quantified there. The second row in the table (red arrow) though helps to figure that out i.e., “greater than 1 year”. This made me realize that even though the fund’s current Average Maturity (0.556) is less than 1 year, there is a chance that this may not always be the case because of the potential 30% allocation. I am not comfortable with this investment strategy as it contradicts my idea of a genuinely Ultra Short Term fund – one that always has Average Maturity of less than 1 year (see filter criterion above). So I decided not to spend any more time analysing this fund.
Pattu: I am going to have to disagree with Anirban here. There is no definition of what an ultra short term fund should be. Practically all mutual funds (except perhaps liquid funds as they mandated by SEBI) have a wide range of variation in the average portfolio maturity.  So being too strict on the selection criterion is not a good idea. It is perfectly okay to hold a fund whose avg maturity varies a bit.
IDFC Banking Debt Fund
From the SID:
The highlighted parts (in yellow) indicate that this fund is very cautious about Credit Risk, minimising it by investing in high-quality instruments, by not investing in even medium-quality instruments and by restricting itself mostly to securities from banks. I like such approach. But I could not find anything specific related to Average Maturity in the SID. So I decided to look into its Monthly Factsheets and found something interesting there.
From current Factsheets:

From old Factsheets:

To me it looked like they were talking about keeping Average Maturity within a year. But I was not sure (I am a novice, remember?). So I decided to look up the Average Maturity mentioned in their Monthly Factsheets and this is what I found:

Now their strategy made more sense to me! It also revealed that the Average Maturity has never exceeded 1 year in the 4 years of its existence (The fund was launched in March 2013). This is in spite of the fact that the Fund Manager has changed in between (was: Anupam Joshi, is: Harshal Joshi). So it met my criterion for being a true UST fund. Looking at the many Factsheets also confirmed that they do follow the investment strategy declared in the SID and have always held securities only from reputed banks.
Pattu: When I checked the fund’s factsheet it appears they are buying newer bonds each month to change the avg maturity. I assume that they are doing this to reduce interest rate sensitivity as every March approaches and also book some capital gains if the price increases (more on this later).  This will also reduce credit risk even if they are holding AAA bonds as the holding period is quite short. Whether this strategy is prudent or even necessary is debatable, but as a conservative investor, if they stick to this,  I can buy the fund from March to any other March to minimise both rate and credit risk. Personally, I am okay with a fund that has a “constant” average maturity that hovers about a bit.
With that settled, I wanted to get some idea about its past performance. So I fetched the NAV history from the Association of Mutual Funds in India (AMFI) website. Putting that in MS Excel, I calculated the 1-year, 2-year & 3-year returns (annualized for the latter two). While the below graphs may not be totally accurate (because I messed up a bit with the 2Y & 3Y intervals!), they are not very much off the mark also – enough to give me some sense of the past returns and volatility, which is what I was looking for.
The NAV history also told me something more about the volatility. In 2013, the NAV had suddenly dropped (due to the crash in bonds when the RBI increase overnight rates by almost 2% to stabilise the rupee) and it had taken around 2 months for it to recover from that fall. This was because of the higher Average Maturity (when compared to Liquid Funds) resulting in an increased Interest Rate Sensitivity (again in comparison to Liquid Funds). In a Liquid Fund, I would have expected this recovery to take no more than a few days.
My takeaway from this analysis of IDFC Banking Debt Fund:
  • It is a true-blue UST fund, with Average Maturity never exceeding 1 year.
  • Credit Risk is minimal due to the special attention in having only very high-quality holdings. Pattu: and due to the holding period of each security.
  • Interest Rate Sensitivity is obviously more than Liquid Funds
  • And the whole exercise has been quite fun!
 Finally, this post would be incomplete unless I thank one person – Ashal Jauhari. I cannot even begin to explain how much I have learned from his comments in AIFW. In fact what had triggered my reading about UST funds was a reply of his to a question I had posed – can suitable Debt Funds be a realistic alternative to Fixed Deposits for parking some part of one’s Emergency Corpus? Thank you, sire!


Please join me in thanking Anirban for a fine analysis and his generosity in sharing it with the DIY community.

Download the  Free E-book: A Beginner’s Guide To Investing in Debt Mutual Funds


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  1. Anirban Ghosh it’s really a nice article and helps in choosing debt fund. I personally feel, choosing equity MF is easy.. The way you showed how to analyze the debt fund helps in choosing the right fund depending on the time horizon of investment.

  2. All I can say this is the exact post I was looking for and you both saved lot of my time. Kudos and Thanks to both of you.

  3. Very informative and useful post. Would appreciate a similar analysis of Franklin India Savings Plus Fund (another debt fund under UST category). I am planning to invest in any of the three debt funds (Axis Treasury/IDFC Banking Debt /FT India Saving Plus funds) for an investment horizon of 3 to 5 years.

  4. First of all, thank you Pattu for asking me to write this guest post. Must admit it’s a rather odd feeling to see my elementary notes in the very blog from where I’ve learned so much. And your comments complement my understanding of this fund, even the one where you disagree with me.

    Thanks to the other commenters as well. If this encourages other beginners like me to dig deep and try to make sense of some MF then that would be a great reward for the time I spent on it.

  5. IDFC Banking Debt fund objective is changed and now it has sensivity is on Medium. So how can we get convinced on 2017 scheme objective docs which are subject to change and too in just one yr ?

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