Investors are looking for safe investment horizons with a short maturity duration. Mutual funds are long-duration funds, but there are short-duration funds as well. Investors looking for an investment period of 1 year to 3 years with low risk, these short term debt funds are the best options. This article will help you understand the benefits of investing in such a scheme and guide you on selecting the best fund available from the existing options.
What is a short term debt fund?
The open-ended mutual fund schemes which have a maturity period of 1 year to 3 years and invest in debt and money market instruments are classified as short term funds. These short-term debt funds invest in high-quality assets that are having low-risk but provide relatively low returns.
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Why invest in short term debt funds?
It is suitable for those who want to invest their extra cash for 1-3 years, to earn a higher return than fixed-income investment options like FD’s.
Compared to long-term bonds, these funds provide a better return with less risk and are less sensitive to rising inflation.
These are highly liquid as investors have easy access to their cash, though some funds may charge exit load if the investment is redeemed early, usually between 1-6 months.
They are a good option for those who want to invest for a longer duration than liquid and ultra short-term funds.
Tax treatment for short term mutual funds
There are two options to choose from Dividend or Growth. Tax treatment for both differs from each other. In the growth option, the returns are added to the investor’s income and taxed similar to a fixed deposit – 10% without indexation and 20% with indexation. In contrast, the returns in the dividend option are tax-free.
Things to be considered before investing
- Financial Goals and Objectives – Before investing, investors should always write down their goals and objectives and see if it aligns with the fund’s objectives.
- Fund Performance – An investor should always look at the past performance of the fund in both the bullish and bearish market situations. It helps the investor to select the most reliable fund. One should always invest in those funds which have provided consistent returns over the years.
- Fund House and Management – There are many Asset Management Companies (AMC’s) that provide numerous fund options. An investor should look at the management and the fund house, as it plays a significant role in asset management, which will help the fund perform better in different market conditions and provide good returns.
- Costs – Usually, investing in mutual funds involves costs like an expense ratio, exit load, entry load, minimum investment, etc. an investor should choose from the fund whose costs he can bear easily.
- Other Parameters – An investor should also look at some of the other parameters like Asset Under Management (AUM), Net Asset Value (NAV), Beta, Alpha, etc. which will increase the fund’s trust.
The returns from Short-term Debt Funds are comparatively higher as compared to Bank Fixed Deposits. Seeing the tax benefit and the post-tax returns, it still offers more returns than other investment options. T
These funds are quite liquid and are a good option for those who want to invest for a short period and earn quite high returns. Also, analyze different fund schemes with each other with the above-mentioned methods and parameters before making the final decision.