Franklin India Low Duration Fund

Franklin India Low Duration Fund is an open- ended income fund. The fund invests in corporate bonds and other fixed income instruments. The objective of the fund is to provide nominal returns by assumption of low risk. The fund is comparable to short term fixed deposits. The fund has an average maturity period of 1 year. The risk associated with this fund is low.

Investment objective of Franklin India Low Duration Fund

The Scheme seeks to earn regular income for investors through investment primarily highly rated debt securities.

What is an income fund?

Income funds are funds which focus on generation of regular and nominal income, they do not focus capital appreciation. The underlying instruments of these funds include Government bonds, municipal bonds, corporate debt, preferred stock, money market instruments and dividend paying stocks etc., Money market instruments refer to certificate of deposit, commercial paper, short term treasury bills.

Plans and options available for the scheme

The various options available for the fund are -

• Monthly Dividend Plan (MD)
• Quarterly Dividend Plan (QD)
• Growth Plan (GP).

Dividend plan is where there will be regular payout of funds in the form of dividend, one can either ask for payout or reinvestment. The funds declared as dividend will be reinvested in the fund as on that date. Growth plan is one where there are no intermediate payouts, the funds remain invested and on returns are in the form of capital appreciation.

Direct plan is where there is no entity in between fund house and investor. Regular plan is where there is a broker in between fund house and investor.

• Long-term capital gains (LTCG) tax @20% (plus surcharge, if applicable and cess) with indexation if units held for more than 36 months
• Short-term capital gains (STCG) tax at the income tax slab rate if units are held for less than 36 months
• Investor does not pay any tax on dividends but a Dividend Distribution Tax (DDT) is deducted at source @29.12% (25% + 12% surcharge + 4% Health & education cess) for Individuals and @ 34.944% (30% + 12% surcharge + 4% Health & education cess) for any other person.
• In case of an investor being NRI, LTCG tax are chargeable @ 10% (plus surcharge, if applicable and cess) without indexation relating to units redeemed from unlisted schemes.

Current portfolio (as of 30 January, 2019)

The current portfolio is a mixed bag of short term debt instruments and money market instruments which reflect low interest rate sensitivity and low credit quality. The number of instruments held by the fund are 90 with an average maturity of 0.88 years. The yield to maturity is at 10.2%.

Portfolio composition of Franklin India Low Duration Fund

The portfolio is well diversified with 90 securities. This is close to 2x times that of the peer average. However, the fund has an average YTM (yield to maturity) of 10.2% as against the category average of 8.7% which translates to 1.5% higher than average returns. While the fund may run the risk of being perceived as over diversified, it has managed to justify its wide diversification by posting higher YTM.

The fund has a wide set of instruments within its realm. Below is top 25 securities held by the fund –

The credit rating of the instruments held by the fund becomes critical. It is interesting to understand how the portfolio is designed in comparison to the benchmark against which the performance Is measured.

It can be observed from the above distribution, that the fund has invested in instruments with lower credit rating which has resulted in a calculated increase in risk level. However, the assumption of higher risk has resulted in higher YTM.

As stated earlier NAV is the critical factor which is used to arrive at the returns. The time period can range between daily, weekly, 1 month, 3 months, 6 months, 1 year, 3 years, 5 years, 7 years, 10 years etc., depending on the existence of the fund. Below is the performance snapshot of Franklin India Low Duration Fund –

The fund is of short term duration; hence, one needs to look at the short term returns particularly before investing. The investor needs to get a general understanding of how the fund has performed with respect to its benchmark and category and then invest after due diligence.

Income funds tend to provide attractive returns at low risk assumption. They are often juxtaposed against low duration term deposits or other such debt instruments. The returns on income funds tend to fluctuate and are not guaranteed. The returns tend to fall in a raising interest rate scenario and rise during a falling interest rate scenario. It is often used to hedge the existing debt portfolio which typically tends to move along with the market interest rates. This fund are ideal for investors who intend to park their fund for a short duration and earn decent returns at low risk.