UTI Short Term Income Fund is primarily an accrual-oriented income fund with the flexibility to take advantage of the yield movement at the shorter end (1 to 3-year segment) of the curve.
The fund predominantly invests in high quality CDs, CPs and corporate bonds with tactical exposure to sovereign instruments like G-Secs, SDLs, etc. to actively manage duration. The fund manager takes tactical exposure to G-Secs based on evolving market conditions and/or economic outlook.
In the recent monetary policy announcement, MPC voted unanimously to maintain the repo rate at 4.00% and continue with accommodative stance as long as necessary to sustain growth on a durable basis.
Thus giving a state based guidance rather than a time based guidance which means that RBI is not willing to commit itself to any fix timelines for continuation of accommodation due to uncertain economic outlook.
Further, the Governor announced introduction of Variable Rate Reverse Repo (VRRR) auctions of longer maturity which comes as an extension towards normalizing liquidity and suggests that MPC believes that growth is likely to be intact despite a second wave of Covid.
This can also be seen from the projections for growth which are retained at 10.5% for FY’22. The Governor also announced the G-sec acquisition program (G-SAP) wherein RBI would make open market purchases of G-sec of Rs. 1 lakh crore in Q1FY2021-22.
This likely to support and stabilize long term yields. Going ahead, UTI expects the yield curve to flatten from the current levels where the longer end of the curve would be supported due to the GSAP while the yields on the shorter end might see some uptick due to announcement of VRRR.
Even though there is flattening bias, we expect the recovery to be slow and the liquidity is likely to be in surplus mode in the near term, which would help support the yields at the shorter end. In such a scenario, investors may look at UTI Short Term Income Fund which is positioned to capture yield movement in 1 to 3 year segment.
This fund can be part of investor’s core fixed income portfolio for an investment horizon of 12 months and above.