Prime Recommendation: A low-risk debt fund for any time frame

Whatsapp share
Tweet it out
Share on FB
Post on LinkedIn

Can a low-risk debt fund with an average duration of around just 1.2 years deliver an average 3-year return (rolling 3 year returns since inception in March 2009) of 8.7%? And what if the worst ever 3-year returns of this fund was 7%? This is not the performance of a high-quality accrual fund or a duration fund. We’re talking of a fund that can be used for both your short term and long-term needs, thanks to its structure, duration and performance.

About the fund and suitability

Aditya Birla Sun Life Floating Rate (ABSL Floating Rate) is a floater fund that existed well before the ‘Floater fund’ category came into being in 2018 under SEBI’s new fund category. Floating rate funds are required to invest predominantly in floating rate bonds or use derivatives and swaps to this effect. ABSL Floating Rate is suitable for short term investors with a minimum time frame of 3 months and for any long-term period as well.

Floating interest

While we have stated that the minimum holding is 3 months, we find that the fund’s return is optimal closer to its average duration of around 1 year as it cuts down the chance of any losses and helps benefit from any interest rate moves. Hence, a 1 year would be a preferred minimum holding period. The fund is suitable for:

  • A short-term portfolio with minimum time frame mentioned above
  • The more liquid portion of an asset allocated long-term portfolio
  • A systematic withdrawal plan portfolio

Floater funds

While ABSL Floating Rate has a mandate to invest at least 65% in floating rate instruments, it is not easy for this fund nor its category peers to achieve this by purely holding floating rate notes.

The reason is that at present, the floating rate bond market is still nascent. While companies have been using such bonds to fund their short-term needs, they are limited. But more recently the Government of India has started issuing such bonds too. While this is expected to deepen the floating rate market, at present, floater funds like ABSL Floating Rate make do with some holdings in floating rate notes and instead use interest rate swaps (IRS) and forward rate agreement (FRA) to create the floating structure.

To give a simple example – a swap would allow the fund to swap the interest (not the principal) on its fixed-interest securities for floating interest or vice versa, with a counterparty.  If the fund expects rates to move up, it might swap the fixed interest for a floating one. This way, it would be able to up the cash flow on its papers when rates move up, even if it holds fixed interest instruments.

In addition to swaps, forward rate agreements and interest rate futures help these funds to protect themselves from interest rate risk.


ABSL Floating Rate is not among the highest returning in the small universe of just 8 floater funds. This is because the average maturity of this fund has traditionally been lower than its floater peers, enabling the others to deliver better in a lowering rate scenario. The average maturity of the entire category was at 2.5 years as of October 2020, as opposed to 1.2 years for ABSL Floating Rate.

The advantage for ABSL Floating Rate is that it is less prone to negative returns than peers. For example, higher performing funds such as Kotak Floating Fund ad Nippon India Floating Rate have rolling 1-month negative returns of 8-10% as opposed to just 1.65% for ABSL Floating Rate. This makes this fund more suitable for shorter time frames as well.

In fact, this is among the only floater fund that we have under our minimum 3 month – 1.5 year holding, along with other ultra-short, low duration and money market funds. Note that we have consciously put the other floater fund in our recommendation list – HDFC Floating Rate Debt in our 1.5-3-year bucket.

ABSL Floating Rate Fund scores well when compared with the entire universe of ultra-short, low duration, money market and floater funds. Its exposure to papers less than AA+ rating, which was negligible earlier, is nil now. At 8.7%, its rolling 1-year return (over 2017-20) is superior to the average 6.7% of all 4 categories put together.

ABSL Floating rate, however, can be more volatile than ultra-short, low duration and money market funds, owing to its higher duration, hedging strategy notwithstanding. And remember, its swaps may at times not work in its favour, if the rate calls it takes does not work as anticipated.

In the past 5 years the fund had weekly negative returns 6.5% of the times as opposed to 3% for the universe we mentioned earlier.

This is the primary reason why the fund should not form the chunk of your short-term investments of less than 1 year. Investors should use this to supplement returns for their income generating portfolio (SWP) or for very-short duration investments.


As of mid-November 2020, ABSL Floating Rate had high-quality papers with 22% in central and state government bonds, 61% in PSU and AAAA-rated corporate bonds and rest in money market instruments.

If you are trying to look for those fixed interest securities whose interest rate the fund swaps with counterparties, you would be unable to identify them specifically in the portfolio disclosure. You will at best find mention of interest rate swaps in the portfolio. The fund has Rs 7160 crore of assets and is managed by Kaustubh Gupta and Panay Sinha.

Why now

We have mentioned in our earlier articles too that we are likely close to the bottom of rate cycle and should see an up move in a year or less. In general, reducing duration and moving to shorter duration funds is a strategy (which we will discuss in another article soon) that is called for when rate cycle moves up.  

If this be the case, we think that this fund may have a slight edge over other very-short duration funds in terms of quickly re-adjusting to higher interest rates, even if it carries a fixed earning security. However, as explained above, you need to remember that the fund will carry higher volatility than other very short-term peers. You also need to know that when interest rates move up significantly, then funds such as money market and low duration may yield even better with less volatility.

Hence, judiciously mix this fund with others, for shorter periods of less than 1.5 years. You might want to check how we do that in our less than 1 year and 1-3 year time-frame based portfolios.

Also Read : A low risk mutual fund option for the conservative equity investor

Share via Whatsapp
Tweet it out
Share on FB
Post on LinkedIn

More like this

Please note that any specific queries on any of our recommendations will be answered ONLY through email. If you are a subscriber, please mail  Only general queries or discussions will be answered through the comment section of the blog. For full details, please refer to this post – How to communicate with PrimeInvestor.

38 thoughts on “Prime Recommendation: A low-risk debt fund for any time frame”

  1. Thanks Vidya for a well-written article. I understand Floating rate funds are good bet when interest rates are expected to go up, but what strategy do they use to keep giving somewhat decent returns in a downward cycle ?

    1. They try to partly play longer duration as they have a 2-4 year (or more) window for capital appreciation. Floating rate funds do not have any set regualtory restriction on this. Also, rate swaps can work both ways. you may be able to swap your floating bond (not many out there but available at shorter duration) for a fixed (higher one) too. thanks, Vidya

  2. Thanks Vidya for the article. I have invested in this fund ( guess from the day you have recommended in prime fund list), a corporate bond fund and a constant maturity gilt fund.
    Is it better to keep this funds as my long-term portfolio as debt part (E:D 70:30)of my overall portfolio.
    Since we have to track the debt funds more consistently due to FT fiasco (got impacted in their low duration fund), these doubts comes in to my mind.

    1. Sir, as long as you keep tab of Prime funds and the review tool, it should be fine. We’ll let you know if we change our view. thanks, Vidya

Comments are closed.

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

The essence of PrimeInvestor

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

Legal Disclaimer : PrimeInvestor Financial Research Pvt Ltd (with brand name PrimeInvestor) is an independent research entity offering research services on personal finance products to customers. We are a SEBI registered Research Analyst (Registration: INH200008653). The content and reports generated by the entity does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. All content and information are provided on an ‘as is’ basis by PrimeInvestor Financial Research Pvt Ltd. Information herein is believed to be reliable but PrimeInvestor Financial Research Pvt Ltd does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. The services rendered by PrimeInvestor Financial Research Pvt Ltd are on a best-effort basis. PrimeInvestor Financial Research Pvt Ltd does not assure or guarantee the user any minimum or fixed returns. PrimeInvestor Financial Research Pvt Ltd or any of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates will not liable for any losses, cost of damage incurred consequent upon relying on investment information, research opinions or advice or any other material/information whatsoever on the web site, reports, mails or notifications issued by PrimeInvestor Financial Research Pvt Ltd or any other agency appointed/authorised by PrimeInvestor Financial Research Pvt Ltd. Use of the above-said information is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. All intellectual property rights emerging from this website, blog, and investment solutions are and shall remain with PrimeInvestor Financial Research Pvt Ltd. All material made available is meant for the user’s personal use and such user shall not resell, copy, or redistribute the newsletter or any part of it, or use it for any commercial purpose. PrimeInvestor Financial Research Pvt Ltd, or any of its officers, directors, employees, or subsidiaries have not received any compensation/ benefits whether monetary or in kind, from the AMC, company, government, bank or any other product manufacturer or third party, whose products are the subject of its research or investment information. The performance data quoted represents past performance and does not guarantee future results. Investing in financial products involves risk. Investments are subject to market risk. Please read all related documents carefully. As a condition to accessing the content and website of PrimeInvestor Financial Research Pvt Ltd, you agree to our Terms and Conditions of Use, available here. This service is not directed for access or use by anyone in a country, especially the USA, Canada or the European Union countries, where such use or access is unlawful or which may subject PrimeInvestor Financial Research Pvt Ltd or its affiliates to any registration or licensing requirement.

Aditya Birla Mutual Fund • Axis Mutual Fund  Baroda Mutual Fund BNP Paribas Mutual Fund • BOI AXA Mutual Funds Canara Robeco Mutual Fund • DSP Mutual Fund  • Edelweiss Mutual Fund
Essel Mutual FundFranklin Templeton Mutual FundHDFC Mutual FundHSBC Mutual FundICICI Mutual FundIDBI Mutual FundIDFC Mutual FundIIFL Mutual FundIndiabulls Mutual FundInvesco Mutual FundITI Mutual FundKotak Mahindra Mutual FundL&T Mutual FundLIC Mutual FundMahindra Mutual FundMirae Asset Mutual FundMotilal Oswal Mutual FundNippon India Mutual FundPGIM Mutual FundPPFAS Mutual FundQuant Mutual FundQuantum Mutual FundSahara Mutual FundSBI Mutual FundShriram Mutual FundSundaram Mutual FundTata Mutual FundsTaurus Mutual FundsUnion Mutual FundsUTI Mutual FundsYes Mutual Funds

Equity: Large Cap Funds | Mip Cap Funds | Large And Mid Cap Funds | Small Cap Mutual Funds | Contra Mutual Funds | Dividend Yield | Focused Mutual Funds | Find Top Index Funds | Best Sector Funds | Thematic Mutual Fund | Best Value Mutual Funds | Equity Linked Savings Scheme | Tax Saving Funds

Debt: Banking And PSU Funds | Corporate Bond Funds | Credit Risk Funds Mutual Funds | Dynamic Bond Funds | Floating Rate Funds | Gilt Mutual Funds India | Find Top Liquid Funds In India | Long term debt funds | Low Duration Funds Debt Funds | Medium Duration Debt Funds | Medium To Long Duration Funds | Money Market Debt Funds | Overnight Debt Funds | Short Duration Debt Funds | Ultra Short Term Debt Fund
Hybrid: Aggressive Hybrid Funds | Arbitrage Mutual Funds | Balanced Advantage Mutual Funds | Conservative Hybrid Funds | Dynamic Asset Allocation | Equity Saving Funds | Multi Asset Funds | Multi Asset Allocation
Mutual fund rolling returns by category: Balanced Advantage | Conservative Hybrid Fund | Corporate Bond | Dividend Yield | Dynamic Bond | Equity Linked Savings Scheme | Floating Rate | Index Funds | Large and Midcap fund | Large Cap Fund | Liquid funds | Low Duration | Mid Cap Fund | Multi Cap Fund | Short Duration | Small cap Fund | Solution Oriented – Childrens Fund | Ultra Short Duration

Login to your account