FundsIndia Recommends: Birla Sun Life Treasury Optimizer

Dynamic bond funds, income funds, short-term debt funds – confused about what category to invest in? If you are simply looking to invest in a debt fund for over two years as a substitute for your FD,  Birla Sun Life Treasury Optimizer (BSL Treasury) is a good option – it can provide better returns than FDs, with limited risks.

The fund

BSL Treasury is benchmarked to the Crisil Short Term Bond index. The fund is classified as a short-term debt fund on the AMC’s website. But its current average maturity of 6 years may seem deceptive when read against its mandate. From being classified as a short-term debt fund to an income fund by multiple rating agencies, BSL Treasury is a bit of all of these. This is because, even while it takes a higher average maturity as it does currently, such a move is more of a tactical call and not a long-term move. It is also cushioned with adequate short-to-medium term instruments.

In our view, this fund is practically a go-anywhere fund. However, it does not take on credit risk or very high interest rate risk like a pure gilt fund. At best, it may dynamically alter its average maturity, thus either adding some long-term gilts, like it has now, or holding more certificates of deposit and commercial papers like it did until 2013, when short-term interest rates were sky-high.

Suitability

BSL Treasury is not for investors who are looking to play specific strategies such as ‘stay with short-term maturities’, ‘stay with long-term maturities’ or ‘go with just AAA-bonds’ and so on. This fund is simply for those who want FD-plus returns with low risks. The risk here stems from interest rate calls; but even that is not too high considering that the fund does not have very long average maturities like a pure gilt fund. However, short periods of negative returns, like in January and February 2016 (when the fall was less than 1 per cent) cannot be ruled out. You will do well if you do not get spooked by such temporary dips arising from any sudden rise in yields.

If you have a two-year plus view, you can consider this fund. It has a minimum holding period of three-years, but will provide you capital gains indexation benefits. The current double-digit return is not sustainable, as a good part of the rally in gilt is over. The fund has the potential to give you FD-plus returns; so set your expectations with that base.

Performance

BSL Treasury is among the few funds in the debt category to consistently beat the benchmark index. The fund beat its benchmark 90 per cent of the times on a rolling 1-year return, rolled over the last 5 years. Of course, that it did so by dynamically changing its portfolio (while its benchmark does not do so) means that it is not the right comparison.

We therefore took the average deposit rates in the recent decade (about 8 per cent) to compare.  We found that on a rolling 1-year return basis over the last 5 years, the fund has delivered returns lower than 8 per cent less than 4 per cent of the time. The average 1-year rolling return over these 5 years was a strong 9.8 per cent.

The fund’s point-to-point returns have been impressive too (see graph). We also tried comparing the fund across various debt fund categories and found that it comfortably beat the category average of all categories – dynamic bond, income accrual or short-term over 3 and 5-year periods.

Portfolio

In July, BSL Treasury held about 55 per cent of its portfolio in gilts and 32 per cent in AAA-rated instruments. A small chunk was in AA-rated papers and the rest in cash and other instruments. The average maturity was about 6 years. This is marginally higher than the maturity in January 2016. There have been years, such as 2013 and 2014, when the fund hardly held any long-term gilts and stuck to AAA bonds or certificates of deposit and commercial papers. Those were the times when accrual paid well as coupon rates on these instruments were high. From an accrual strategy until 2014 to playing the yield curve for capital appreciation now, BSL Treasury has been pretty deft in its moves.

The fund has Rs. 6,354 crore of assets managed by Kaustubh Gupta and Prasad Dhonde. It currently does not have an exit load.

FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis of investment decisions. To know how to read our weekly fund reviews, please click here.