In this edition of the fund profile, we take a look at the Kotak Short Term Bond Fund. We evaluate its portfolio history and discuss when it can be used.
According to SEBI, a Short Duration Fund is a fund that invests in debt & money market instruments with Macaulay duration of the portfolio between 1 year – 3 years. This is quite difficult for a retail investor to understand. So let us start the Macaulay duration.
What is a Macaulay Duration?
The Macaulay duration is defined as the amount of time it takes to recoup our investment.
Let us under this via an example. If the following discussion is a bit hard for you to understand, you can read the basics in this article: Why you need to worry about “duration” if your mutual funds invest in bonds (the following example is also from this article). Do not invest in debt mutual funds without understanding the risks! Download our free e-book: A Beginner’s Guide To Investing in Debt Mutual Funds
Suppose an Rs. 1000 bond was issued at a coupon rate (interest rate) of 8%. So Rs. 1000 is the original price of the bond and the interest payment each year is Rs. 80.
We wish to buy this bond and there are two more years for maturity. The current yield is 8% (same as the original rate) and therefore the current price is also Rs. 1000.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
After 1Y, we will receive the interest of Rs. 80. After 2Y: Rs 80 + Rs. 1000 = Rs. 1080.
Now out of the Rs. 1000 we paid, say
Rs. X will become Rs. 80 after 1Y at the current yield of 8%. X = 80/(1+8%) = Rs. 74.07
Rs. y will become Rs. 1080 after 2Y at the current yield of 8%.
Y = 1080/(1+8%)^2 = Rs. 925.93
Rs. X + Rs. Y = Rs. 1000 = amount we paid to buy the bond.
Let us look at this in another way.
X/1000 of the original investment will be locked in for 1Y, or
Rs. (X/1000) x 1 Year = Fractional lock-in period of Rs. X = 0.07 years (see table below)
In other words, if Rs. 1000 is locked in for one year, how long should Rs. X be locked in for the same yield in investment:
This is (X/1000) x 1 Year = 0.07 years
Similarly, Y/1000 for the original investment will be locked in for 2Y, or
Rs. (Y/1000) x 2 years = Fraction lock-in period of Rs. Y. =1.85 years
Or, If Rs. 1000 is locked in for two years, how long should Rs. Y be locked for the same yield in investment:
This is (Y/1000) x 2 Years 1.85 years
Macaulay Duration = 0.07 + 1.85 = sum of fractional lock-in periods = 1.93 years.
That is, after 1.93 years, you would have effectively recouped your investment even though you will get your money back only after 2Y.
So Kotak Short Term Bond Fund should invest in such a way that its Macaulay Duration is between 1 to 3 years. This does not mean it will invest in bonds maturing within three years!!
The average maturity of the fund and its Macaulay duration(approximately computed using yield to maturity and modified duration data) is given below.
The Macaulay duration is as per SEBI’s definition for a short term bond fund but the average maturity is not (it need not be). The deviation in trend since June 2020 is due to a gradual increase in yields. Higher the yield, the lower the Macaulay duration. The same relationship also holds for the Modified duration but the change is stronger. To understand the importance of the modified duration, see Why you need to worry about “duration” if your mutual funds invest in bonds.
The historical portfolio maturity profile is shown below. There is some duration play. That is the fund has chosen longer-term bonds when interest rates have fallen.
The variation >5Y bond exposure along with 3-5Y bond exposure is shown below better illustrating the duration play. The fund manager has already started to decrease >5Y bond exposure anticipating a rate increase. From 22% exposure in Feb 2022 to 16% in March 2022.
The credit rating history is shown below. The duration play mentioned above has been to increase gilts with falling rates. The fund has largely invested in high-quality debt. Will they chase after lower credit quality in future is unknown.
The asset type allocation is shown below.
The five-year rolling returns are shown below. The regular plan is chosen for a longer data set. The direct plan returns can be expected to be a bit better.
The return spread is quite large. There is no one return value one can expect from the fund. Only experienced investors who can handle debt fund volatility can consider using the fund for three to seven years.
The 10Y rolling returns data is limited and for what it is worth shown below.
Can we use Kotak Short Term Bond Fund for short term goals? As mentioned above, unless you are an experienced debt fund investor, we do not recommend it for 7Y or less. It can be quite volatile ( in terms of possible returns) over that period.
Can we use Kotak Short Term Bond Fund for long term goals (> 7 Y)? Yes, but with the following caveats
- Do not get fixated on a particular return value. We do not know what the future brings and past performance is not indicative of future performance.
- Do not expect the fund to outperform gilt funds over the long term. The fund will be less volatile compared to a gilt fund but whether this results in higher returns or not depends on which portion of the rate cycle we are in while redeeming or reviewing.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- 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.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr. 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 ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, 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 3,000 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!
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 is 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 get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's 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 with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will 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
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published 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
This 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
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)