With the interest rates inclined for an upward growth at least in the short term, investing in short term funds will be advantageous. Since the long term prediction of interest rates’ depends on macro factors like the crude prices and the economic and fiscal interactions both locally and internationally, the scenario remains highly uncertain. Betting on such risks can make you lose out on your savings and force you into a debt trap of a personal loan or a credit card loan etc., to finance your needs.
Short term debt funds or short duration funds are mutual fund products investing in debt securities that lie at the shorter end of the maturity spectrum. Generally, these funds vary from 3-18 months and are invested in short -term liquid money market instruments with maturities of up to 91 days and medium to long-term debt funds, which invest in long-dated securities which mature between 3 and 10 years. The average maturities of short-duration funds range from 0.60 to 1.5 years and depend to a large extent on fund managers’ rate views as well as the prevailing shape of the yield curve.
The benefits:
- Investor benefits from regular coupon accruals.
- The returns are volatile in a rising, uncertain interest rate environment due to lower average maturity than income (bond) funds that these assets carry.
- If rates go downwards, investors stand to benefit from the possibility of capital gains, in addition to the coupon accruals.
Given the combination of currently high coupon rates and the uncertain interest rate outlook, short term debt funds offer you the best of both worlds – mitigated volatility and attractive coupon income.