Chosing a debt-mutual-fund: I am very angry with you Dhirendra

POSTED BY Sambaran Mitra ON August 13, 2012 9:16 am COMMENTS (18)

I need to invest in a debt fund which gives me returns equivalent to POST-TAX-fixed deposit rates (assuming 30% tax bracket).
To illustrate, the highest fixed deposit rate from SBI is currently 9.25% which leads to ~6.5% return post-tax. A debt mutual fund will have 10% tax incidence on long term capital gain. If the debt-fund return is ~7.2, the post tax return will be ~6.5%. Hence I am looking for a debt fund with 7.2% return.
Higher returns (than 7.2%) is not my priority but security absolutely is. I want a fund which gives me 7.2+% return in as secure a manner as possible.

I have zeroed in on HDFC-Cash-Mgmt-Savings(HCMS). I will elaborate my thought process below. I will be very thankful if you can share your thoughts regarding the same:

  1. For a stupid reason, I am tied to HDFC, Templeton, DSP blackrock and quantum AMC only. So that is the first constraint of my choice.
  2. I started with 4+ star rated funds by value-research, in all-debt category. That led me to HDFC-cash-mgmt-savings(HCMS), Templeton-india-short-term-income-retail(TISTI) and Templeton-India-Income-builder(TIIB).
  3. The first fund I eliminated was TIIB. It got the highest standard deviation of 1.33. My requirement of maximum stability/security stood most compromised with TIIB among the 3 options.
  4. Return wise both HCMS and TISTI are neck-to-neck. One year return is ~9.5 for both. This is much higher than my requirement of 7.2. So nothing to differentiate here.
  5. HCMS has standard-deviation of 0.15 and TISTI has 0.57. This tilts balance in favour of HCMS but I am unsure. Should standard-deviation be the sole measure of volatility? I do not know nor I understand completely.
  6. HCMS portfolio looked very soothing to me. Mostly public sector banks and corporate names with better corporate-governance-reputation. Average credit rating is AAA. This trumps over TISTI whose average credit rating is AA.
  7. Further, HCMS average maturity is 0.12 years whereas TISTI average maturity is 0.96 years. For my requirement of stable-returns, lesser maturity is better.

Hence I choose HCMS.

Two niggling doubts remain:

  1. What is the guarantee that HCMS will stick to AAA instruments with low-average-maturity?
  2. The fund-objective statements look very ambiguous and high-level to me without clear specifics. HCMS fund-objective says that the plan is suitable for institutional investors and corporate treasurer. I am neither, just a puny retail investor. Shall I steer clear?

18 replies on this article “Chosing a debt-mutual-fund: I am very angry with you Dhirendra”

  1. TheZionView says:

    I think we are doing the same thing mentioned in the article.

    We should be keeping it simple(avoid the duds) and not complicate.

  2. @Ramesh,
    Thanks for your detailed response. Thanks for the well deserved barb too. I am unable to understand how I missed Templeton India Low Duration (TILD), a 5-star fund (in my initial search). I agree with your cynicism about the star-rating too.

    However, now let me come to the reasons describing why I still rate HCMS over TILD.
    1. Average credit rating of HCMS is AAA. That of TILD is AA.
    2. Average maturity of HCMS is 0.12years, that of TID is 0.28years. Nothing
    really to differentiate here.
    3. TILD AUM is 2038crore, that of HCMS is 3149.4crore. Your yourself told that
    bigger is better and I agree in this case.
    4. TILD’s portfolio shows few names which I abhor (I know this is irrational,
    but that’s me).
    5. Standard deviation of HCMS is lower (0.15 against 0.29)
    6. TILD indeed has superior returns, but any return beyond fixed-deposit rate is
    not my priority for this portfolio.
    7. Expense ratio of HCMS is significantly lower too.

    So Ramesh, why do you prefer TILD over HCMS?
    As an aside, if you have time and willingness, can you educate me about what is the difference between liquid fund and income-fund?
    You wanted to know why I am stuck to 4 AMCs. It is an interesting reason which involves a bank whose name starts with ‘C’. Ah! but let me not digress.

    1. Dear Sambaran, the very soul of the article of VROL was KISS – Keep it simple silly.

      Now interestingly, this very simple thing is now not in the discussion we are having now. There were 2 funds already in your mind, 1 each added by dear BanyanFA & Dear Ramesh.

      So you problem has increased now from 2 funds to 4 funds – to chose from.

      I’m not saying that the funds offered to you are wrong or the advises are wrong. Actually both are right in their own ways but some where down the line, the simplicity is out of the window. A part of this belongs to you alone for not having a clear picture frame in your own mind.

      To simplify the things – Invest in HCMS as of now. Revisit the question after 3months. If you feel that you want to continue your investment for next 12-15-18months, you may switch to a long term debt fund at that time.



      1. @Ashal,
        Some disagreements:
        > There were 2 funds already in your mind, 1
        > each added by dear BanyanFA & Dear Ramesh.
        > So you problem has increased now from 2
        > funds to 4 funds – to chose from
        No. They did not exacerbate my problem at all.
        BanyanFA recommended Birla Sun life fund. As I said, my choice is limited to 4 AMCs and BSL does not fall in that. So no complication there.
        Ramesh’s recommendation helped me to have a closer look at my reasoning and correct a few mistakes on my side.

        > A part of this belongs to you alone for not
        > having a clear picture frame in your own
        > mind.
        Can you please tell why you believe I am ‘not having a clear picture frame in my own mind’? On the contrary, my requirement is crystal clear to me. May be I could not communicate it properly.

        On a different note regarding Dhirendra’s article, I do hope that I am not deriding/insulting any novice here.

    2. Ramesh says:

      My views on your points.

      1. I am cynical of the credit ratings also. See, India’s overall rating is BBB-, so how come AAA or AA of any of its instruments works. Very very subjective of the credit rating agencies, and no future value of those too.
      Plus, check the ratings of the holdings of both funds in morningstar. AAA in both, with individual breakdown too.

      2. HCMS is a liquid fund with majority in cash and cash equivalent, money market funds. TILD has some exposure to corporate bonds too.

      3. Beyond a certain level of corpus, it doesnt matter. 15k corpus is as ok as 2k. I was mainly concerned with 50-60 crore corpus funds.

      4. Overall, the risk grading of TILD is lower according to VRO.

      5. Standard deviation is related to the total returns, and is not related to decrease in value. Eg. if the FD rates over 3 years have changed from 6% to 9%, that means a variation of 33%-50%. Is that bad? Think about it.

      6. Why not then put money in FD? Because, if by taking the same kind of risk (any MF is risky), if you are getting more returns, why would you not do that?

      7. Returns include the expense ratio. So even with higher expense ratio, TILD scores.

      But it is your call.

  3. Ramesh says:

    Maybe a Wrong Track of Reasoning Disorder is more correct. 😉

    Let me try this (this may be a different wrong track too):

    Your requirements:
    1. Stability and protection of principle of the highest order.
    2. If possible, get better tax adjusted returns.
    3. No real knowledge of duration, but the minimum of 3 months is there with an undefined longer limit.
    4. A limited list of AMC choices, namely DSP, HDFC and Templeton. Quantum does not have much choices. (I am mainly thinking that you have direct AMC access, rather than an intermediate service provider).


    1. Stability is mostly provided by good quality instruments, by a good AMC. The liquid, ultra-short, short-term funds are the ones which do that. Liquid funds will be the least risky in those terms, but come with lesser return usually and so on.
    2. So instead of your list of All debt funds, you should have concentrated on these 2/3 categories. Templeton India Income builder is an income fund and not suited for your purposes.
    3. In debt funds, you should think about getting a larger fund, which will have the least trouble in paying you back. And second thing is the expense ratio. Star ratings are even more senseless in debt funds than in equity funds.

    Personally speaking, with your requirements, I would have zeroed on Templeton Low Duration fund – growth option.

    See if this makes sense for you.


  4. BanyanFA says:

    Would you mind elaborating your investment time horizon ? The fund chosen by you is an excellent choice for upto 1 year horizon.

    If you have more than 1 year time horizon, you may want to split your funds slightly into HDFC Short Term. If by any chance you can invest into Birla funds, then the best out of that cateogory would be BSL Dynamic Bond Fund.

    Banyan Financial Advisors

    1. @BanyanFA,

      My time horizon is ‘undefined’. It may be 3 months, it may be 3 years. I do not know. So I think the lower number should apply and I should say that my horizon is 3 months.

      As I said in my post’s bullet#1, my choice is limited to the four AMCs I mentioned. This is unfortunate. On the flip side, it is a boon in disguise as I had lesser ‘research’ to do with lesser options. The debt-mutual-fund market looked absolutely maddening to me, with so many different options and me knowing so little about them.
      (But why should I blame mutual fund industry alone? Overwhelming the customer with options is the bane of running-shoe-industry, computer-vendor-industry as well, and may be many more)

  5. @Ashal, Yeah I noticed the irony. Its just that it is very difficult to stop ‘reasoning’ once you get the itch of it. Compulsive Reasoning Disorder is how the psychiatrists might classify this disease.
    Coming back to point, any expert comment on the topic of my choice of HCMS?

    1. Dear Sambaran, HCMS is a good choice. Please continue with this.



  6. Dear Sambaran, after reading your first query & the VROL link, Now I’m able to understand the full value of that VROL link. 🙂

    Can you yourself see it – the efforts put in by you & the very soul of that article. 🙂

    Too much complication made by you.



  7. Dominic Prakash says:

    Frankly I did not do much analysis. All I checked was last 1, 3 and 5 year returns from VResearch. I feel that STOpp gives me better return than HCMS but only difference is 30day exit period which I am ok with. After investment I tracked returns for about 10 days and I was convinced. Now I am doing FlexSTP to my Top200 and Prudence. Hope this helps.

  8. Dominic Prakash says:

    I have invested in HCMS then I switched to Short Term Opportunities fund. The STOpp gives about 9.9% for the past 9 months. There is no guarantee in any MF.

    BTW why are you angry with Dhirendra?

    1. I am a big fan/follower/admirer of DhirendraKumar of value-research. The headline was a comment in jest. It was in response to this article ( where he indicated that selecting funds can be an easy process provided I trust value-research-ratings. I had to spend at least a week to arrive at the above conclusion. That was not a simple effort at all.
      My small disagreement notwithstanding, the article by Dhirendra’ is a classic (as most of his posts are). I believe this man can give any literature humorist a run for money.

    2. @Dominic.
      did you switch over to STOpp for higher return? Was there any other rationale to drop HCMS?
      Thanks for your reply in advance.

    3. Abhishek says:

      Hi Dominic,

      HDFC Cash Management is a Liquid Plus Fund.. I would not recommend HDFC Short Term Opportunities just because it has high returns.. If you want liquidity and Safety, HDFC Cash Mgmt Treasury is the Fund to be in.


      1. @Abhishek,
        Can you please elaborate why will you chose HDFC-cash-mgmt-TREASURY over HDFC-cash-mgmt-SAVINGS?

        (As an aside, I am absolutely unable to understand what is the difference between the TREASURY and SAVINGS plans, beside the name)

      2. Dominic Prakash says:


        >> I would not recommend HDFC Short Term Opportunities just because it has high returns.. If you want liquidity and Safety, HDFC Cash Mgmt Treasury is the Fund to be in. <<

        Just wondering why do you say you wont recommend?
        STopp 's Risk Grade is "Below Average"

        But CMgmt Saving's (or Treasury) Risk Grade is "Average"

        Risk Grade is better in STOpp. Could you please comment on this. Thanks in advance.

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