Birla Sun Life Short Term Opportunities Fund: One of the best credit opportunities funds

In our article,Top 5 short term debt mutual funds in 2015, we had reviewed some of the best short term debt funds based on certain criteria. While short term debt funds are ideal for conservative investors looking for stable returns over a period of 1 to 2 years, credit opportunities funds offer investors to earn higher yields over a 2 to 3 year time period. These funds, sometimes also known as corporate bond funds, are similar to short term debt funds. The fund managers of credit opportunities funds lock in a few percentage points of additional yield by investing in slightly lower rated corporate bonds. Despite the slightly lower credit rating of the bonds in the credit opportunities fund portfolio compared to a say a short term debt fund portfolio, the overall credit quality of good credit opportunities funds is quite high. In fact, Securities Exchange Board of India has been reviewing norms of investment in corporate bonds by mutual funds since August 2015, when a particular Asset Management Company faced some issues with respect to downgrade of a corporate bond in its portfolio. In fact, a few days back SEBI tightened norms with respect to company and sector specific exposures of debt mutual funds. Birla Sun Life Short Term Opportunities Fund, however, has been one of the best performing credit opportunities fund, giving nearly double digit returns over the past three years.

The chart below shows the trailing annualized returns of Birla Sun Life Short Term Opportunities Fund and average category returns of Credit Opportunities Funds over 1 year, 2 years and 3 years investment tenures.

Source: Advisorkhoj Research and Moneycontrol.com

We can see that over a 2 to 3 year, investment horizon Birla Sun Life Short Term Opportunities Fund has been a clear outperformer. The chart below shows, the annual returns of Birla Sun Life Short Term Opportunities Fund since 2011. We can see that the over the past 5 years, this fund has given excellent returns almost every year.

Source: Advisorkhoj Research

Fund Overview

The scheme was launched in May 2003 and has an AUM of nearly र 3,400 crores. The expense ratio of the fund is 1.28%. The minimum investment in this scheme is र 5,000. Sunaina Da Cunha and Kaustabh Gupta are the fund managers of this scheme. In addition to the usual growth and annual dividend options, the scheme also has a quarterly dividend option. CRISIL ranks this fund 1 and Morningstar has a 4 star rating for this fund.

To understand the risk return characteristics of Birla Sun Life Short Term Opportunities Fund, let us quickly recap two debt fund investment strategies that we have discussed several times earlier in our debt fund blogs.

Debt fund managers employ two different kinds of investment strategy:-

• Hold till Maturity:

  This is also known as accrual strategy, by which the fund invests in certain types of fixed income securities (or bonds) and hold them till maturity of the bond, earning the interest offered by the bond over the maturity period.



• Duration Calls:

  Using this strategy the fund manager, takes a view on the trajectory of interest rates. Bond prices go up when interest rate falls and declines when interest rate goes up. When interest increases duration call strategy will give a lower return, and when they decrease the same strategy will give higher returns.

Let us understand the risks involved with debt investments. There are, primarily, two kinds of risks associated with debt funds:-

• Interest Rate risk:

  Interest rate risk has opposite effect on hold to maturity strategy versus duration calls. Typically, a fund manager who employs a hold to maturity strategy will invest in short term bonds. If interest rates go up, the fund manager will be able to lock in higher yields with a hold to maturity strategy in short term bonds. On the other hand, the fund manager taking duration calls will invest in long term bonds because bond prices are inversely related to interest rates. Therefore, short term debt funds which invest in short maturity fixed income securities, have lower interest rate risks. Birla Sun Life Short Term Opportunities Fund employs accrual strategy and therefore the interest rate risk is low. The modified duration of Birla Sun Life Short Term Opportunities is about 3.1 years.



• Credit Risk:

  Credit risk is the risk of default by the borrower. In case of debt funds, it is risk of default by the bond issuer, either with respect to interest payment or principal repayment or both. For credit opportunities funds like Birla Sun Life Short Term Opportunities Fund credit risk is an important factor. We should understand how credit risk works in terms of risk and return. Credit rating agencies like CRISIL and ICRA in India rate fixed income securities based on their credit risk. Higher the credit rating, lower the yield but the risk is also lower. Let us understand how credit rating scale works. The table below describes the credit rating scale used by CRISIL to rate debt securities.

We should understand that, just because a bond’s credit rating is not AAA, it does not mean that it will default in interest or principal re-payment. AA rated bonds also offer high capital safety while giving a higher yield or interest. We should understand that credit risk should not be a concern for the investors in Birla Sun Life Short Term Opportunities Fund, since the 93% of the portfolio is invested in AAA or AA rated papers denoting high credit quality.

Yield to Maturity

Yield to maturity (YTM) is the return which the debt fund will get by holding the securities in its portfolio to maturity. The YTM of the fund portfolio is 8.97% and the modified duration is 3.1 years. This implies that if there are no changes to the fund portfolio, it can give a return of 8.97% over the next few years before expenses. Investors investing in short term debt funds should try to match their investment horizon with the modified duration of the fund portfolio. If there is a big mismatch between the investment horizon of the investor and the modified duration of the fund portfolio, then the return expectation of the investor may not be met.

Portfolio

The company concentration risk of the fund is fairly well diversified. The top 5 corporate bond holdings in the portfolio account for 30% of the portfolio value. Government bonds account for about 27% of the portfolio. 8% of the portfolio is held in cash. SEBI has recently tightened the company and sector specific exposure norms. From a company concentration perspective there should be no impact of the revised norms on Birla Sun Life Short Term opportunities Fund. In terms of revised sector limits, like many debt funds, there may be a potential impact on the portfolio, particularly with respect to investment in NBFC bonds. Investors should bear this in mind when investing in the fund. The new SEBI norms are meant to strengthen the risk control mechanisms of the funds and are in the best interest of the investors. Therefore, overall this is a positive development.

Dividend Track Record

Birla Sun Life Short Term Opportunities Fund, Quarterly Dividend Option, has an excellent Dividend payout rack record. The table below shows the quarterly dividend payout record of the fund over the past three years.

Source: Advisorkhoj Research Historical Dividends

Conclusion

Birla Sun Life Short Term Opportunities Fund is a great investment option for short and medium term investments. In light of the recent SEBI norms, investors should monitor the developments in the debt fund space and consult with their financial advisors if Birla Sun Life Short Term Opportunities Fund is best suited for their short and medium term investment needs.