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SBI Magnum Extremely Brief Period Fund

We profile debt mutual funds once in a while in our fund profile part. This time we take into account SBI Magnum Extremely Brief Period Fund.  Launched in Could 1999, the fund at the moment has an AUM of Rs. 12,513 Crores.

What’s an ultra-short period fund? Extremely-short period funds are outlined as “funding in Debt & Cash Market devices such that the Macaulay period of the portfolio is between 3 months -6 months.

Extremely brief period funds are NOT the identical as Extremely short-term funds.

What’s a Macaulay Period?

The Macaulay period is outlined because the period of time it takes to recoup our funding.

Allow us to below this through an instance. If the next dialogue is a bit laborious so that you can perceive, you’ll be able to learn the fundamentals on this article: Why it’s essential to fear about “period” in case your mutual funds spend money on bonds (the next instance can also be from this text). Don’t spend money on debt mutual funds with out understanding the dangers! Obtain our free e-book: A Newbie’s Information To Investing in Debt Mutual Funds

Suppose an Rs. 1000 bond was issued at a coupon charge (rate of interest) of 8%. So Rs. 1000 is the unique worth of the bond, and the curiosity fee every year is Rs. 80.

We want to purchase this bond, and there are two extra years for maturity. The present yield is 8% (identical as the unique charge); due to this fact, the present worth can also be Rs. 1000.

After 1Y, we are going to obtain the curiosity of Rs. 80. After 2Y: Rs 80 + Rs. 1000 = Rs. 1080.

Now out of the Rs. 1000, we paid, say

Rs. X will change into Rs. 80 after 1Y on the present yield of 8%. X = 80/(1+8%) = Rs. 74.07

Rs. y will change into Rs. 1080 after 2Y on the present yield of 8%.

Y = 1080/(1+8%)^2 = Rs. 925.93

Rs. X + Rs. Y = Rs. 1000 = the quantity we paid to purchase the bond.

Allow us to have a look at this in one other manner.

X/1000 of the unique funding shall be locked in for 1Y, or

Rs. (X/1000) x 1 Yr = Fractional lock-in interval of Rs. X = 0.07 years (see desk beneath)

Macaulay duration for a two year bond

In different phrases, if Rs. 1000 is locked in for one yr, how lengthy ought to Rs. X be locked in for a similar yield in funding:

That is (X/1000) x 1 Yr = 0.07 years

Equally, Y/1000 for the unique funding shall be locked in for 2Y, or

Rs. (Y/1000) x 2 years = Fraction lock-in interval of Rs. Y. =1.85 years

Or, If Rs. 1000 is locked in for 2 years, how lengthy ought to Rs. Y be locked for a similar yield in funding:

That is (Y/1000) x 2 Years 1.85 years

Macaulay Period = 0.07 + 1.85 = sum of fractional lock-in intervals = 1.93 years.

That’s, after 1.93 years, you’d have successfully recouped your funding regardless that you’ll get your a refund solely after 2Y.

So SBI Magnum Extremely Brief Period Fund ought to spend money on such a manner that its Macaulay Period is between 3 to six months. This doesn’t imply it’s going to spend money on bonds maturing inside six months!!

The change within the definition of this class is most unlucky, as one can see from the portfolio Maturity profile of SBI Magnum Extremely Brief Period Fund.

Portfolio Maturity profile of SBI Magnum Ultra Short Duration Fund
The portfolio Maturity profile of SBI Magnum Extremely Brief Period Fund

Earlier than the brand new SEBI definition, the fund solely invested in bonds with a maturity of as much as three months and money. Now it holds bonds with 1-3 years of maturity. This unfold in maturities makes this class extra difficult.

The typical maturity profile of the fund is proven beneath in black. The modified period – a measure of rate of interest sensitivity – can also be proven together with the yield to maturity (proper axis).

History of yield to maturity, modified duration and average maturity SBI Magnum Ultra Short Duration Fund
Historical past of yield to maturity modified period and common maturity SBI Magnum Extremely Brief Period Fund.

The rise in maturity and rate of interest sensitivity after the SEBI mutual fund categorization guidelines got here into drive might be clearly seen. Additionally, as soon as see the variable yield to maturity. This implies the returns on these funds have come down significantly over the previous couple of years however might improve as a result of rate of interest hikes.

The five-year rolling returns in contrast with the CRISIL 1=yr treasury invoice index are proven beneath.

5-year rolling returns of SBI Magnum Ultra Short Duration Fund compared with CRISIL 1Y T-bill index
5-year rolling returns of SBI Magnum Extremely Brief Period Fund in contrast with CRISIL 1Y T-bill index

Discover a powerful drop in returns over the previous couple of years as a consequence of falling rates of interest. Traders should admire that debt mutual funds are market-linked merchandise, and one can’t fixate on a selected return from them.

The credit standing profile of the fund is proven beneath.

Credit rating profile of SBI Magnum Ultra Short Duration Fund
Credit standing profile of SBI Magnum Extremely Brief Period Fund

A1+ is the short-term (<1Y) bond ranking equal of AAA, which is given for longer-term bonds. The change within the nature of the fund after the SEBI categorization is clear once more. The fund additionally invests a small portion in AA-rated bonds as nicely once in a while The spikes above 100% signify bond derivates like rate of interest swaps. There shall be a corresponding destructive entry within the portfolio, so the sum is 100%.

Can we spend money on SBI Magnum Extremely Brief Period Fund?  Sure, however provided that you recognise the dangers. It’s meant for buyers who can abdomen assured increased threat than liquid funds or cash market funds for potential increased reward.

For what durations can we select this fund? For durations increased than three years. To understand this reasoning, see: The best way to begin investing in debt mutual funds – a primer.

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