Investment in Short-term Funds Secures Higher Returns than FDs

By | May 21, 2012

Short-term investment options in mutual funds offer better returns to investors as compared to fixed deposits. These instruments include liquid funds, income funds, and ultra short-term funds, which make investments in debt instruments and the money market, and are more profitable than fixed deposits, if you are seeking to make an investment for a period ranging from one month to two years. While fixed deposits do not offer high returns, when an investment is made for a short period of time, top funds can provide returns as high as 8-9% for a period of 1-6 months. This is because these funds churn and mix their portfolios, investing in an array of financial securities with different maturity periods. Also, their exit load is zero or very low as compared to the fine charged on the early withdrawal of fixed deposits, before their due date, which can vary from 1-2%. Investors are also benefited with the tax efficiency of these short-term mutual fund schemes, thereby presenting investors with an offer that is hard to miss. These funds can provide the edge if you are smart enough to decide the tenors and the funds and invest wisely. If you are new to the world of investing, with the initial investments in short term funds you can avoid the need for borrowing debt like a personal loan to go abroad for a vacation or a car loan to purchase your dream ride.

Investors must be prudent while choosing a fund in this regard. You must watch out for the credit rating of your preferred debt instrument. This is mandatory when the fund has a relatively long focus and is tend to invest in risky instruments. Also, one must consider the expense ratio of the fund which must always be below the category average, so as to ensure that any sudden redemption does not have a massive impact on the cost of the scheme. Investors are also required to consider the interest rate risk of the selected fund since longer the maturity of the scheme, higher will be its rate risk. In a scenario where the interest rates are expected to rise, it is advisable to make an investment in fund schemes with the least maturity period and vice-versa.

The different types of short-term funds you can select from, keeping your risk profile and investment horizon in mind are liquid funds, as they invest in only those debt instruments that have a maturity period that does not exceed 91 days. No exit loads are charged on them and they are easy to deal with as compared to other instruments, as they possess low credit risk and interest rates. Ultra short-term funds are also another option for short-term investment, as they invest in debt securities that mature with a period of one year. However, investors must be cautious as prematurely exiting from these funds can lead to a loss. These fund schemes offer differential dividend tax treatment, and are thereby beneficial for investors who earn large sums of money. Short-term funds are another option, for they invest in debt instruments which mature within the period of one year. They have a low or moderate interest rate risk, and are suitable for investors with an investment horizon of 18 months to 2 years. Short-term instruments like income funds are a good option for investors who are seeking schemes that offer a steady source of income. They not only add diversity to your portfolio, but also moderate the highs and lows of your investments. Although these funds are prone to a greater interest rate risk, they offer relatively higher returns. Gilt short-term funds make investments in government securities that have a medium or long-term period of maturity. Their net asset values increase steeply, when the rates fall down. Also, these funds offer flat or negative net asset value returns in an environment of rising interest rates.

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