Best short duration or short term mutual fund schemes to invest in 2019

Short duration schemes or erstwhile short term funds are open-ended short-term debt schemes that invest in instruments with macaulay duration between one and three years.

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Here's an update on our recommended short duration funds. The good news is- there is no change in our list of recommended schemes this month. In February, only three short duration schemes managed to make it to our recommendation list. UTI Short Term Income Fund was removed from the list as it did not meet the parameters set in our methodology. However, we advised investors to continue investing in this scheme.

Since we follow a quant-based methodology, some schemes may get out of the recommendation list. Some may also find a place in the list. That doesn’t mean that you should stop investing in schemes that got out of the list. Follow the usual practice when it comes to reviewing your mutual fund portfolio. Review at least once a year. And if the scheme has beaten its benchmark and category average, continue with it.

Mutual fund advisors have been recommending short duration mutual fund schemes to conservative investors looking to invest in debt mutual funds. These advisors reason since there is no clarity on interest rate movement in the near term, investors would be better off in a short duration scheme.


According to the new Sebi categorisation norms, short duration schemes or erstwhile short term funds are open-ended short-term debt schemes that invest in instruments with macaulay duration of between one and three years.

This means investors can consider investing in these schemes with a horizon of a few years.

As said earlier, most mutual fund advisors have been asking investors to stick to short duration schemes for a while. Faced with many uncertainties in the money market and possibilities of rate hike by the Reserve Bank of India (RBI), most mutual fund advisors have been asking investors to avoid taking risk and park their money in short duration schemes.

If you are new to debt mutual fund schemes, here is why you should stick to short duration schemes at the current juncture. A rate hike is considered bad news for debt mutual fund schemes, especially long-term debt schemes.
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This is because of the inverse relationship between rates (bond yields) and bond prices. When rates go up, the prices of bonds fall. When prices of bonds fall, it drags the net asset value or NAV of debt mutual fund down. Long-term bonds are extremely sensitive to interest rates changes. So, debt mutual funds that invest in long-term bonds suffer the most when the central bank hike or start hiking interest rates.

Therefore, most mutual fund advisors are recommending short duration debt mutual fund schemes to investors these days. They reason that even if the central bank is to hike interest rate, its impact would be less in short duration schemes.

So, if you are planning to invest for a few years, short duration schemes must be your choice. To make your selection process easier, ET.com Mutual Funds have put together a list of short duration schemes. Here are our recommended short duration debt mutual funds:

Best short duration funds to invest in 2019
HDFC Short Term Debt Fund
ICICI Prudential Short Term Fund
Axis Short Term Fund

Methodology:
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ET.com Mutual Funds has employed the following parameters for shortlisting the debt mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.

i)When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii)When H <0.5, the series is said to be mean reverting.
iii)When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.
Asset size: For Debt funds, the threshold asset size is Rs 50 crore

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