How to choose the best short-term mutual fund?

by swinxpress
How to choose the best short-term mutual fund

Short-term mutual funds, also known as short-term debt funds in India, help investors balance higher returns and lower risk. Short-term funds invest in debt instruments with maturities ranging from one to three years, making them an ideal option for investors with short-term financial goals. This article will define the concept of short-term mutual funds and enlist the advantages they offer. You will also find a detailed explanation of the types of short-term debt funds in this article. 

What are short-term debt funds? 

Short-term debt funds are mutual funds that invest in fixed-income securities with relatively shorter maturities. While the investment horizon of these funds is shorter as compared to medium-term income funds, it is longer than the investment horizon of liquid funds. Short-term funds offer stability and potentially higher returns over a short period.

Investors can also consider the following types of debt funds that have short maturity periods:

  1. Liquid funds: Liquid funds are the most conservative short-term debt funds. They invest in money market instruments and debt securities with very short maturities, usually not exceeding ninety-one days. Due to their short duration and high-quality holdings, liquid funds offer high liquidity and low risk. They are suitable for investors looking to park surplus funds for a short period without risk.
  2. Ultra-short-term debt funds: Ultra-short-term debt funds have slightly longer maturities compared to liquid funds, usually ranging from three to six months. These funds invest in a mix of money market instruments, commercial papers, certificates of deposit, and short-term government securities. While they offer slightly higher returns than liquid funds, they still maintain a focus on capital preservation and liquidity.
  3. Low duration funds: Low duration funds have a longer investment horizon, with maturities typically ranging from six months to a year. They invest in a combination of short-term government securities, corporate bonds, and money market instruments. These funds aim to strike a balance between generating returns and managing interest rate risks.

What are the advantages of investing in short-term mutual funds?

  1. Lower risk: Investors consider short-term debt funds to be less risky than equity funds since they primarily invest in debt and money market instruments as well as government securities.
  2. Stability and liquidity: Short-term debt funds offer high liquidity, allowing investors to access their funds quickly without any exit loads. 
  3. Attractive returns: While short-term debt funds may not offer the same potential for high returns as equities, they can still provide attractive returns. 
  4. Diversification: Including short-term debt funds in your investment portfolio can enhance diversification. If you have several equity-related investments, a short-term debt fund can help you balance your portfolio.

Short-term mutual fund investments pose the risk of interest-rate fluctuations and credit quality of the underlying debt instruments. As interest rates change, the value of these funds’ holdings may be impacted, affecting the overall returns. Before investing in a short-term mutual fund, you must consider your overall investment horizon and the returns that you wish to earn through your investment. 

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