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SHOULD YOU INVEST IN SHORT TERM DEBT FUNDS?
Short-term debt funds are mutual funds designed for low-risk investors with a one- to three-year time horizon. These funds are characterized by stable returns and low risk. Because of their similarities, these funds can be likened to fixed deposits. If you hold a short-term debt fund for more than three years, you will receive tax benefits. This makes them preferable to traditional fixed deposits.
Mutual Fund investments, in general, are thought to be for long-term debt funds. That is not correct! Short Duration Funds or Short Time Debt Funds are a type of fund that allows investors to invest for the short term while keeping their money accessible. Although there are several Short Duration Funds accessible in the market, investors are advised to seek the top Short Duration (Short Term) Debt Funds.
What are Short-Term Debt Funds?
A short-term debt fund is a mutual fund plan that invests for one to three years, although it can also be extended to four years. This investment is often accompanied by consistent profits and low risks. Due to comparable investment conditions, short-term debt funds are sometimes equated to bank Fixed Deposits (FDs) of identical tenures when investing.
Short-term funds do not incur a penalty if redeemed before the maturity date unless redeemed before the pre-determined timeframe. This period typically ranges from five days to six months. FDs, on the other hand, notwithstanding their high liquidity, have a penalty of up to 1% if redeemed before their maturity date.
Types of Short-Term Debt Funds
Short term debt funds are defined as debt funds where the period of maturity is less than three years. However, Short Term Debt Funds have varied maturities. The various types of short term debt funds are as follows:
- 1. Liquid Funds
Liquid funds invest in instruments that mature in 91 days or less. These can include commercial papers, certificates of deposit, and treasury bills are all investments made by liquid mutual funds. Liquid mutual funds are an excellent substitute for bank FDs owing to the historically better returns they have given.
- 2. Ultra Short-Term Debt Funds
These, in essence, are open-ended debt funds that invest in securities with maturities ranging from three to six months. Because the holding period for ultra-short-term funds is so short, interest rate risk is low.
- 3. Low-Duration Funds
Low duration debt funds invest in securities with maturities ranging from six months to one year. Private corporations, public companies, and the government can all issue these documents.
Benefits of Investing in Short-Term Debt Funds
Let's discuss the factors that make short-term debt funds the best investment option in 2021.
- Stable Profits and Return
Liquid funds, variable-rate funds, corporate bond funds, ultra-short-term funds, and so on are all types of debt funds. The holding time of the investment instruments in these funds is used to classify these funds. Government securities, treasury bills, corporate bonds, money market instruments, and other financial instruments are examples of investment instruments.
These instruments typically provide a fixed rate of return and have a predetermined maturity date, among other things. These instruments generate consistent returns since they are not immediately and are significantly influenced by the capital market.
Flexibility is a major benefit that distinguishes short-term debt funds from medium- and long-term debt funds. You can redeem short-term debt mutual funds at any moment without incurring any exit load penalties. Exit load is a fee charged by the fund house if you redeem from a fund before a certain time period.
Some debt funds, such as credit risk debt funds, have an exit burden that can last up to 540 days! This prevents you from utilizing your own money in an emergency. Short-term debt funds, on the other hand, have no exit load and can be redeemed at any moment.
- Tax Benefit
Unlike interest collected on bank deposits, which is taxed, earnings gained through short-term debt funds with a maturity length of more than a year would attract lesser tax, particularly for assesses in the high-tax bracket.
Debt funds provide a wealth of benefits to investors, making them a popular choice today. High liquidity, greater tax return, increased chances of larger returns, and so on are some of the advantages that various forms of debt funds provide to their investors. Visit Muthoot Finance where we provide the best short term debt funds that have been carefully picked based on thorough research, insight and analysis based on historical fund performance.