The Highway to Profitability – Short-term debt funds

By BankBazaar | November 13, 2011

There is good news for investors of short-term debt funds. Analyzing their recent behavior in the market, studies indicate that short-term debt funds reduce the rate of volatility, offering high and good returns to investors. This is because there has been an elevation in the short-term interest rates, with the yield curve likely to remain pressurized over a period of time. This has been caused due to the ever-increasing high inflationary expectations. Long-term interest rates, on the contrary, remain uncertain due to a rapid change in its macro factors. With transcending differences in both, local and international macro factors, with crude prices and the current fiscal position as key variables, it may be safe to say that this is a conducive period for investing in short-term debt funds.

Short-term debt funds, as the name suggests, are mutual funds products, for a short period of time, that are used to invest in debt securities and other commodities, which lie at the shorter end of the maturity spectrum. It caters specifically to investors who seek to invest their funds for a short period of time, while expecting higher returns. With the maturity period ranging from 90 days to 18 months, these products primarily make investments in liquid funds, investing in highly liquid short-term money market instruments, that have a maturity period ranging for as long as 91 days. Investments are also made in medium and long-term funds, which in turn invest in instruments, with a maturity period varying from 3 years to 10 years. Thus, it is up to the discretion of the investor to select a short-term debt fund that caters to his requirements in the best possible manner.

Investing in short-term debt funds brings two-fold advantages to the investor. First, the investor is benefited by the process of regular accruals of coupons. Next, since the funds possess a low average maturity period, the unpredictability of their funds is highly reduced, in an otherwise unstable market scenario. On the down side, if the rates of short-term debt funds crash, investors may still benefit from its capital gains and coupon accruals. With the Reserve Bank of India taking a stiff stand on the tight liquidity scenario in the country, the yield curve for the fiscal year of 2011 till date has been in an inverted shape. As a result, yields on products with a maturity period of not more than 12 months benefited greatly than other long-term instruments. Thus, short-term debt funds are a leap forward on the highway to profitability, in an otherwise uncertain money market for investors. Ensure that you know the particular fund in which you desire to invest in; performance in the past and present; and then invest only a handful of the amount into it. Investing a major chunk of your investments in it will be quite risky as there is always a possibility for such bets to get awkwardly bad and eventually wiping your investments. You will be left with no other option other than borrowing debt to fulfill your financial requirements. Debts like personal loan or a home loan to purchase your dream home will be ultimate choices. If this happens then they probability of earning and enjoying maximum returns from your investments will be reduced as your funds will be used to pay the EMIs or to be charged with interests on your loan accounts. Even if you have a debt, make sure that you prepay the loan as soon as possible so that your finances may not affect your future growth.  Following these minor yet major principles will ensure a good track for a healthy growth of your investments.

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