Summary:
Short term debt funds are mutual funds with shorter maturity or holding tenure. Typically, they invest in debt and money market instruments like papers of government, banks and corporations. The short term debt funds are relatively stable as they are less sensitive to changes in the interest rates of the market.
Businesses, corporations, small and large companies and even individuals, all invest to consolidate growth. Everyone has different investment goals that are associated with their needs. In a country like India, where financial markets are becoming more and more sophisticated, short term debt funds have become very popular. It is an outstanding way to make stable returns while minimising risks. In fact, investors often prefer these funds over equity investments, which refer to the money invested in the shares of a company.
In this blog, we will delve into the best debt funds for short term and understand the risks and rewards they offer. Before we dive in, it is essential to understand these funds in depth.
Short term debt funds: Definition, benefits and considerations
As the name suggests, short term debt funds refer to mutual funds that mainly invest in a portfolio of debt securities. These tend to have shorter maturities that range from a few months to a few years. These debt securities consist of corporate bonds, government bonds and other fixed income securities. Corporate bonds are issued by corporations to provide ready cash to fund a particular project established by the company. Similarly, a government bond is issued by a body to aid public spending. In fact, some debt funds even offer better returns than fixed deposits. Click here, to know more.
Let’s look at some of the major advantages and key considerations to keep in mind before investing in even the best short term debt funds -
| Benefits | Considerations |
| Short term debt funds are more stable and safer. As compared to equity funds they are less volatile and make an attractive alternative for investors seeking steady returns. | Even though typically of low-risk, it is important to conduct risk assessment. Factors such as credit risk, liquidity risk and interest rate risk must be carefully evaluated.
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| They offer high liquidity, meaning investors can redeem their investments quickly, which makes them ideal for people who need to access their funds on short notice. | Your investment horizon must align with the fund to maximise returns and minimise volatility. For instance, short term debt funds are best suited for investors with a shorter timeframe. |
| There are certain tax benefits to short term debt funds in India. For instance, capital gains from investments held for less than three years are considered to be short term and are subject to regular income tax. After that, they qualify as long-term and have lower tax rates. | Choose funds that have lower expense ratios as they can significantly impact your returns. Remember, every mutual fund charges some expense ratio for managing them on your behalf. |
| These funds often invest in a broad range of debt instruments to mitigate risk. Diversification helps curb the impact of defaults on individual securities. | Assess the credit quality of the portfolio, individual or company. It simply refers to the ability of a person or a company to repay the debt they have taken. |
| These funds are managed by professional fund managers with the expertise of the market, which ensures better fund performance and higher returns. | Keep a close eye on the exit load. It is the fee charged by mutual fund houses if investors choose to exit a scheme partially. Several mutual funds charge for early redemptions which can eat into your returns, especially if you want to access funds before a specific holding period. |
Best short term debt funds
Example of some of the best debt funds for short term –
| HDFC Short Term Debt Fund | This short term debt fund offers minimum risk and high liquidity |
| ICICI Prudential Short Term Deb Fund | It seeks to build income from investments in different debts and financial instruments while maintaining a balance between yield, liquidity and safety |
| UTI Short Term Income Fund | This debt mutual fund scheme generates a sustainable amount of income with low risk and higher liquidity from a diverse range of debt and financial instruments |
| Aditya Birla Sun Life Short Term Opportunities Fund | This scheme generates income and capital appreciation by investing all of its capital in a diversified debt portfolio |
| BNP Paribas Short Term Fund | The investment goal of the Baroda BNP Paribas short duration direct fund growth scheme is to make reasonable income from a suite of securities |
You can also explore some of the best mutual funds for short term investments
Diversify your investment portfolio with short term debt funds
Short term debt funds are a valuable addition to the investment portfolio, particularly for the risk-averse investors in India. They offer a blend of safety, stability and liquidity. At the same time, it is crucial to keep in mind the key considerations to ensure you are leveraging these funds adequately and exploring their full potential.
For tips on how and when to invest in debt funds, click here.
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Disclaimer
The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.