IIFL Short Term Income Fund

As MF gains are tax-free, the upside here is much more attractive than those from FD returns

WHAT IS IT: The new fund offer (NFO), IIFL Short Term Income Fund, is an open-ended income fund, open for subscription till September 11.

INVESTMENT OBJECTIVE: The scheme seeks to generate income and capital appreciation through investment in debt instruments and money market instruments and to achieve stable returns over short-term investment horizons.

BENCHMARK: Crisil Short Term Bond Fund Index.

ASSET ALLOCATION: The scheme will allocate 80 per cent to 100 per cent of assets in debt instruments and/or money market with a residual maturity of less than three years, and up to 20 per cent in debt instruments with a residual maturity of less than five years.

INVESTMENT STRATEGY: The fund will try to achieve stable returns while focus will be on higher accrual income by allocating assets more towards low to moderate average maturity to take advantage of tempo rary increases in short term yields during tight liquidity conditions, for example, before advance taxTypical payments.

Instruments for asset allocation will include certificate of deposits, commercial papers, treasury bills and shorter tenure corporate bonds.

PLANS & OPTIONS: The fund will offer regular and direct plans. Under each plan, dividend, growth and bonus options are available.

MINIMUM APPLICATION AMOUNT: Minimum investment amount in the NFO is Rs 10,000 and in multiples of Rs 100 thereafter. Under the systematic investment plan (SIP), one can have an option of Rs 1,000 per month for a minimum period of six months or a quarterly SIP option of Rs 1,500 per quarter for a minimum period of four quarters.

The top 10 open-ended short-term income funds have given one-year returns as high as 8.25 per cent to 9.74 per cent. As mutual fund gains are taxfree, the upside from investment here is much more attractive than those from FD returns of 8.75 per cent to 9.5 per cent, which are taxable. With recent RBI actions, overnight and short-term rates of debt papers have shot up to above 11 per cent levels. Overnight rates have gone up by around 300 bps since the end of June. As a result, short-term rates are near their highest level in last five years. The fund is slated to benefit further if RBI lowers interest rates. Of late, investors have suffered mark-to-market losses in their debt fund exposures due to volatility in bond yields, especially in long-term debt funds. Performance of short-term funds will also depend on short-term commercial papers' quality and fund manager's ability.