Do you know how many categories of debt funds exist?
For the inexperienced, there are a total of 16 debt funds. Thus, it is natural for retail investors to feel confused about the categories suitable for their investments. If you are interested in mutual funds with a shorter maturity spectrum, you can look at three categories. These include ultra-short duration, low duration, and short-duration debt funds.
Understanding short-duration funds
Short-duration funds are open-ended schemes. They invest in assets with a maturity period of at least 15 to 91 days or lesser. Investors interested in low-risk asset options should invest in these types of funds. But an investor who wants to invest for a short duration, around 15 days or less, should opt for liquid funds. If they wish is to invest in funds having a maturity spectrum of 2 to 4 months, ultra-short-term mutual funds are ideal.
Where do short-duration funds invest?
The investment of short-duration funds is allocated in a range of debt funds. These include government securities, derivatives, corporate bonds, securitized debt, public sector enterprises, and bonds issued by financial institutions. A part of the portfolio is also held in money market assets like commercial paper, TREPs, certificates of deposits, and treasury bills. The goal of investing in money market assets is to maintain liquidity.
Short-duration mutual funds do not have any credit quality norms. Thus, these funds can allocate the money in lower-rated debt to earn higher earnings. Depending on the current market conditions and a fund’s investment style, the degree of exposure to lower quality debt will be decided.
Earnings on short-duration funds
The returns from short-duration funds are through interest and capital gains. The interest-earning is from interest payments on the fund’s debt holdings. Moreover, with falling market interest rates, the value of the securities held by the fund rise, leading to capital gains. Similarly, with increasing interest rates, the fund faces capital losses.
Benefits of short-duration debt funds
There are many reasons why investing in short-duration funds is a good idea. These include:
- Higher returns
When compared with traditional fixed-income investments, the returns from these funds are more.
- Moderate risk
The interest rate risk associated with short-duration funds is moderate compared to medium or long-duration mutual funds. It is because they invest in relatively more short-term securities.
- Higher yields
When compared with liquid, low duration, ultra-short duration, overnight, and money market funds, the yields from short-duration funds are higher.
- Steady returns
Since fund value does not change with market movements, short-duration funds can give stable returns with moderately low risk.
Conclusion
Short-duration mutual funds invest in debt and money market securities. The duration of the portfolio is between 1 and 3 years. Investors earn on short-duration funds through interest income and capital gains. Tata Capital Moneyfy app offers goal-based investment options and allows you to achieve your goals by investing through SIP or lump sum money.