Short term debt funds for short term goals

Short term debt funds for short term goals

Debt mutual funds can be classified according to their holding periods, such as short-term debt funds and long-term debt funds. Short-term debt funds mean that they invest in debt and money market instruments with a Macaulay portfolio duration between 1 year and 3 years. The returns of short-term debt funds have low volatility.

Investors who are conservative or want to hold a certain portion of their assets in fixed-income securities can invest in short-term debt mutual funds. Debt funds have different risk profiles, allowing investors to choose funds based on their appetite for risk and expectations of the performance of these funds.

Investors in debt mutual funds are exposed to inherent risks, such as interest rate risk, credit risk, liquidity risk, and market risk, etc. Interest rate risk refers to the risk in your investment when the prices of purchased securities rise or fall due to changes. Macroeconomic conditions such as high inflation, high public debt, adverse impact on the rupee due to the high current account deficit, and other world market events. Credit risk refers to the risk that the securities held by the fund will be downgraded or when the issuer of the securities defaults on the payment of principal or interest. Market risk refers to the risk that the underlying securities may not be settled at the price at which they are valued because the market is not deep enough to absorb the sale of the securities.

Investors who want to keep their money for a very short period of time, but want slightly higher returns than a savings account and are willing to take market risks, can invest in liquid funds offered by mutual funds. These liquid funds are short-term debt funds in nature and invest in instruments maturing within 91 days.

So if your goal is very short term or you are investing in a different asset class or you have almost reached your goal, it is generally suggested to switch to debt funds as they are compared to equities. They are less volatile.

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