September 20, 2016

How Short is ‘Short Term’?

What should one expect to be the average maturity of a debt fund that has the words ‘short term’ in its name?  And what if the fund has the words ‘ultra short term’ in its name?  Is it fair for a debt fund with the words ‘medium term’ in its name to have a shorter maturity than one that has the words ‘short term’ in its name, especially if both are managed by the same fund house?

These questions came to the forefront in the course of a conversation I had with an investor last week.  A couple of days earlier, he had made an investment in ICICI Prudential Ultra Short Term Plan, with the intention of withdrawing it in a few weeks’ time.  The day after making the investment, he discovered, much to his shock, that the said scheme had an average maturity in excess of 2 years.  No doubt, he didn’t do enough research before investing.  Nevertheless, in my opinion, for a fund house to maintain an average maturity of over 2 years in a scheme with the words ‘ultra short term’ in its name, is deceptive, to say the least. 

In a way, I had touched upon these questions in my post, Naming Schemes, over a year ago.  In that post, I had noted (without naming) how the maturity of JM Short Term Fund had swung between 1.5 years (in April 2014) and 8.5 years (in January 2015).  I had also noted (again, without naming) that the duration of Birla Sun Life MF’s Medium Term Plan, at the time, was shorter than the durations of its Short Term Fund and Short Term Opportunities Fund.  My conversation with that investor last week brought back some of those memories.  So after we had spoken, I took a look around to see what had changed.  I give below some facts that caught my attention.  All data is as on 31 Aug, and excludes Gilt schemes and ‘floating rate’ schemes.

  • Schemes with the words ‘medium term’ in their names had average maturities that ranged from 10 months to 6.2 years.
  • Schemes with the words ‘short term’ (and not ‘ultra short term’) in their names had average maturities that ranged from 1.5 months to 5.6 years.
  • Schemes with the words ‘ultra short term’ in their names had average maturities that ranged from 1.5 months to 2.3 years.
  • Reliance Short Term Fund had a maturity of 3.1 years whereas Reliance Medium Term Fund had a maturity of 1.4 years.
  • Birla Sun Life MF’s Short Term Opportunities Fund had a maturity of 5.6 years, its Medium Term Plan had a maturity of 4.4 years, and its Short Term Fund had a maturity of 2.9 years.
  • UTI Short Term Income Fund had a maturity that was nearly identical to the maturity of UTI Medium Term Fund at around 3 years.
  • Invesco MF’s India Medium Term Bond Fund had a maturity of 10 months.  In contrast, its India Ultra Short Term Fund had a maturity of 1 year and its India Short Term Fund had a maturity of 5.2 years.

In my post, Naming Schemes, I had pointed out that in the US, a scheme whose name includes the words, ‘short-term,’ is required to have an average maturity of no more than 3 years.  In India, as far as I know, we still don’t have any such regulations.  But given the diversity and ingenuity that fund houses have shown in interpreting terms such as ‘short term’, ‘medium term’ and ‘ultra short term’, I’m not sure if merely having regulations will help investors.

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