New investors often find choosing a debt fund more complicated than selecting an equity fund. Debt funds are classified based on the duration of the bonds they own, the type of issuers, then there are credit risks to worry about.
So how should an investor who is used to FDs begin investing in debt funds? A good short-duration fund is often the best starting point. These funds do not require you to take a call on interest rate moves in future and simply mimic prevailing interest rates in the market. Contrary to what you would think, if you assess them over long periods, they don’t deliver significantly lower returns than funds that take risky duration and credit calls!
Investors, however, should ensure that the chosen short-duration fund makes the most of available instruments to deliver a better yield and doesn’t take excessive credit risk. One fund that strikes this balance is ICICI Prudential Short Term Fund. The fund is part of Prime Funds.
In this report, we explain how this fund has performed, its strategy, and its suitability.
What are short duration funds?
By definition, a short-duration fund must maintain a portfolio with a Macaulay duration between one and three years. Macaulay duration represents the weighted average time over which the fund’s bond cash flows (both interest and principal) are received.
Since bonds pay coupons every year, their Macaulay duration is typically lower than their average maturity. The duration of one to three years offers a good trade-off: yields aren’t too low, and interest rate sensitivity isn’t too high. This makes short duration funds good all-weather funds if managed well.
There are no restrictions on the types of bonds a short-duration fund can hold. Typically, these funds invest a small part of their portfolio in government securities (G-Secs), and the rest in corporate bonds and money market instruments of varying credit quality.
Deft debt management
ICICI Prudential Short Term Fund (ICICI Pru Short Term) has been managed by Manish Banthia, the fund house’s CIO, since 19 November 2009. Nikhil Kabra joined the fund’s management team on 28 December 2020.
ICICI Prudential AMC is known for managing credit cycles well. Between 2016 and 2020, when many debt funds faced write-offs, the AMC largely avoided such events. The fund house attributes this to the separation of its credit analysis and fund management teams.
In terms of its portfolio, ICICI Pru Short Term by and large follows a high-quality accrual strategy. However, it uses tactical calls to boost returns as well.
ICICI Pru Short Term has consistently maintained a high-quality portfolio with minimal exposure to lower-rated papers. Over the past year, the fund has had an average allocation of about 83% to top-rated instruments – AAA, A1+, Sovereign, and cash equivalents. Around 11.18% of its portfolio was in the next best credit rated AA+ instruments.
It takes very marginal credit risk; papers rated AA & AA- papers accounted for about 7% of the portfolio. This is a relatively low figure and is well within an acceptable range given the portfolio’s overall maturity. The fund takes no exposure to instruments rated below AA-, a good attribute as it is only rarely that spreads on lower-rated instruments in India compensate adequately for default risks.
The upto 3 year duration restricts the return potential of short duration funds in general. However, what helps ICICI Pru Short Term clock strong performance is its tactical management approach. It takes active calls on allocation between corporate bonds and gilts based on yield spreads across maturities, helping it deliver superior returns across rate cycles.
When the spread of AAA bonds over gilts widens, the fund increases its allocation to AAA bonds and reduces it when the spread narrows. Over the past year, its allocation to AAA bonds ranged between 41% and 58%, while its gilt allocation varied from 16% to 31%.
As per its latest portfolio, ICICI Pru Short Term has a 25% allocation to G-Secs, higher than the category average of 20.5%. This suggests that the fund is trying to benefit from eventual duration gains after the recent rise in G-Sec yields observed since June 2025 (when its G-Sec allocation was only 16%). Within G-Secs, the fund currently prefers longer-maturity bonds, where gains can be higher if rates moderate.
The fund has 53% in AAA-rated corporate instruments (lower than the category average of 65%), and 9% each in AA+ and AA bonds (versus category averages of 5% and 2.5%). This indicates that the fund currently finds spreads in the AA+ and AA segments attractive enough to take slightly higher exposure.
As of September 2025, the fund’s average maturity is 4.55 years, higher than the category average of 3.51 years, mainly due to its longer-duration G-Sec holdings. Combined with its above-average exposure to AA+ and AA bonds, this has resulted in a healthy portfolio yield of 7.31%, compared with the category average of 6.89%.
Performance
ICICI Prudential Short Term Fund has been a stable performer, delivering superior performance across multiple interest rate cycles. Let’s look at its performance in detail.
- In one-year rolling returns, the fund outperformed the category across all metrics with average returns above category. Both its minimum and maximum returns were superior, and it showed lower volatility, reflected in a lower standard deviation.
- This persisted with three-year rolling returns as well, with an average return of 7.93%, 0.94 percentage points higher than the category.
- To check the possibility of losses, we looked into one month rolling returns over the past seven years and here also, ICICI Prudential Short Term Fund outperformed category and index with lower instances of losses compared to category and index.
Over the past seven years, ICICI Prudential Short Term Fund has outperformed its category 93.46% of the time and its benchmark 97.34% of the time on a one year rolling basis. On three year rolling returns, the outperformance was 100% over both category and the index. Index-beating performance is a commendable feat, given that indices are extremely comprehensive and theoretical, making it hard to replicate.
Fund Expenses: The fund’s direct plan has an expense ratio of 0.45%, which is higher than the category average of 0.35%. The regular plan has an expense ratio of 1.07%, which is also higher than the category average of 0.97%. The expense ratio differential, that is, the difference between direct and regular plan expenses is in line with the category average. Considering the expected return from a debt fund is the single digits, there is a strong case for opting for the direct plan.
Fund Taxation: Belonging to the debt category, all capital gains are taxed at slab rates. There is no separation of short term and long term gains.
Risks and suitability
For any investor with an investment period of at least 1-2 years, ICICI Prudential Short Term Fund can be part of their core debt holdings. The fund can also be part of long-term portfolios, as part of the debt allocation, and it helps avoid rate and credit risks. In such portfolios, it can be paired with longer-maturity funds such as corporate bond funds or gilt funds for a balanced debt exposure.
Yes, the fund does not shy away from taking calculated risks, be it on longer maturity bonds or AA bonds, but these are managed through limited exposures and tactical shifts. The fund can see higher losses than peers in the very short periods, however, as long as the holding period is one year or longer, the returns justify the risks.
15 thoughts on “Prime Fund Recommendation – An All-Weather Debt Fund”
Excellent Article, Can you do a similar in-depth review for Hdfc short term fund too. Additionally does Prime investor track the credit quality of underlying instruments for debt funds?
For example percentage of AAA/SOV instruments for the last n years? Any significant deviations might require a review in the portfolio
Sir, I think Kotak Short term fund is good as it doesn’t take any credit risk, so conservative investor ca. choose this for all weather fund. What’s your take on this fund, is it ni better than ICICI Short term fund? Please guide.
Hello Sir,
You are correct; Kotak Bond Short Term Fund does not take credit risk. This fund is also part of Prime Funds.
Whether it is better than ICICI Pru Short Term Fund depends on the investor’s preference. Investors who wish to avoid credit risk entirely and are comfortable with slightly lower returns may choose Kotak Bond Short Term Fund. On the other hand, investors who are willing to take limited exposure to bonds rated below AAA for potentially higher returns may opt for ICICI Pru Short Term Fund.
Best regards
Question similar to the one about a dynamic bond fund.
If the purpose is to have one debt fund in the long term portfolio, how does a short term debt fund compare with i. a floating rate fund and ii. NPS tier two debt funds?
This will be held for the long term. There won’t be any redemption in the short term. Have an arbitrage and an equity savings fund for that.
Is it sensible to have only one debt fund in the long term portfolio if the debt percentage is small (about 20)? Or should one always go for a balanced debt portfolio too as you have said in the section on suitability?
Hello Sir,
Over long periods, floater funds’ returns are comparable to those of short duration funds. NPS Tier II debt funds maintain longer maturities, and hence have different risk–return profiles compared to short duration and floater funds. Their corporate debt funds (Plan C) are comparable to corporate bond mutual funds, though they tend to have longer maturities than most corporate bond mutual funds. Similarly, their government bond funds (Plan G) are comparable to gilt funds. Due to their low fees and longer maturities, they are more likely to generate higher returns than comparable mutual fund categories. However, please note that there is a tax ambiguity regarding NPS Tier II, which is a factor to be considered.
When designing a portfolio, you can decide how granular or how simple you want it to be. While having different categories of debt funds may make the portfolio more optimal, simplicity can sometimes be preferable to optimization. You may refer to our Build Your Own Portfolio tool (https://primeinvestor.in/build-your-own-portfolio/) and experiment with different inputs to view our recommendations for the number of debt funds under various scenarios.
Best regards
You have mentioned Debt funds in prime funds by time period of 1.5 yrs to 3 yrs for short duration funds. I am thinking of investing in short term debt funds for longer period, say 7 yrs. Can I do it or is it necessary to invest only in Gilt funds for longer duration?
On a separate note, I plan to invest in debt funds and withdraw the yearly returns at the end of each year for expenses.
I assume the 3y, 5y, 10y returns shown for debt funds in value research and other sites are compounded returns. If so, my returns would be less when I withdraw at the end of each year, correct? Can you clarify on this?
Hello Sir,
You can invest in Short duration funds for longer term also. It is not necessary to invest only in Gilt funds or Corporate bond funds for the longer term. If an investor is having a longer investment period, by adding Gilt or Corporate bond funds, they can potentially add more returns to the debt portfolio; however, an investor can choose to stick to short duration funds only for simplicity.
I am not sure I correctly understand your question on compounded returns. The below is the returns generated by ICICI Prudential Short Term fund in calendar years 2020 to 2024
2020: 11.49%
2021: 4.67%
2022: 5.44%
2023: 8.1%
2024: 8.38%
If you have invested Rs.100 at the end of 2019 and redeems value above Rs.100 at the end of each year, you’ll be withdrawing Rs.11.49, Rs.4.67, Rs.5.44, Rs.8.1, and Rs.8.38 respectively for years 2020 till 2024 and the balance at end of 2024 will be Rs.100 itself.
On the other hand, if you do not withdraw, the gains will compound and the balance at each year end will be: Rs.111.49, Rs.116.7, Rs.123.05, Rs.133.02, and Rs.144.17 respectively for years 2020 till 2024.
Hope that helps
Best regards
I am talking about trailing 3y, 5y returns shown in PI and other sites. So I can’t expect those returns and should expect less returns if I withdraw at end of each year instead of allowing it to compound. This is what you mean right?
Hello Sir,
Returns for mutual funds for a period longer than one year are usually shown as CAGR (Compounded Annual Growth Rate).
Regarding withdrawing each year versus holding for the entire duration; the total realised value will usually be lower if you withdraw each year from debt funds, since the amount that remains invested continues to compound and grow.
For calculating returns when there are multiple investments or withdrawals, you should use XIRR, not CAGR. XIRR represents the internal rate of return, taking into account all the cash flows. XIRR and CAGR can differ, but whether XIRR is higher or lower varies on a case to case basis.
For example, say a fund gives 10% return in year 1 and 5% in year 2. The fund’s 2-year CAGR will be 7.47%. If you hold it for the entire period without any additional transactions, your return will also be 7.47%.
Now, consider you invest ₹100 at the beginning of year 1, withdraw ₹10 at the end of year 1, and make a full withdrawal of ₹105 at the end of year 2. In this case, your XIRR will be 7.59%.
If another fund gives 5% return in year 1 and 10% in year 2, its 2-year CAGR will again be 7.47%. But if you invest ₹100 at the beginning of year 1, withdraw ₹5 at the end of year 1, and withdraw ₹110 at the end of year 2, your XIRR will be 7.41%.
Please refer to the articles below for more details on mutual fund return calculations.
https://primeinvestor.in/varsity/understanding-mutual-fund-returns/
https://primeinvestor.in/varsity/demystifying-portfolio-returns-using-xirr/
Best regards
It is a very good recommendetation . Need for all season debt fund was a latent issue which needed to be addressed.
My 30% investment is with ICICI Prudential and hence if there is any other similar fund from other AMC, please do let me know.
I came across another category in ET ie Constant Maturity Index Fund. I do not understand this category much. Is that a good substitute as HDFC/ABSL offer such funds?
Hello Sir,
We do have recommendations on other short duration funds. Please check Prime Funds: https://primeinvestor.in/prime-funds/
Constant maturity funds invest in GSecs with maturity close to 10 years. These funds are more volatile due to longer maturity. We do have a recommendation from this category, marked for long term debt investments. Please check Prime Funds for this also.
Best regards
Thanks for your prompt response.
Let me reframe my query. ICICI PRU short trem debt fund reviewed is suitable for any holding period (1-2 years to long term). Funds recommended in prime fund there is no such fund which is suitable for such holding period. There are different funds for different holding period ie 3Mto 1.5yrs, 1.5yrs to3 yrs, 3to5yrs and 5yrs and above.
Single fund for 1-2 yrs to long term gives considerable flexibility. Since to avoid AMC concentration I am looking for similar fund from any other AMC except ICICI PRU.Is there an alternative to this fund against this background? Hope now my query is clear.Look forward to your early feedback
Hello Sir,
You may look at the funds in the section ‘Short term – 1.5 to 3 years’. These funds can be held for more than 3 years as well. If an investor knows the investment period is longer, they can pair it with other longer debt categories (e.g. Long term – above 5 years); but if this is not decided in advance (i.e, chances of redeeming at 3 years or any time after that), it is better to stick with funds in the category ‘Short term – 1.5 to 3 years’
Best regards
How about 1 Dynamic Bond fund (example : IPRU All Seasons Bond Fund) that can serve the needs of debt fund with varying duration adjusted dynamically, instead of the recommended IPRU Short Term Fund,
Hello,
Dynamic bond funds have a different risk profile than short duration funds. Their interest rate risks can be substantial at times, hence needs a longer minimum investment duration than what is appropriate for short duration funds. They also tend to take more credit risks.
Best regards
Comments are closed.