Safe haven type of investments become more attractive to investors when the market is uncertain. Equity markets can be volatile, and long-term debt investments can seem insecure. It is in times like these that short duration funds simply gain their popularity. They provide a compromise between safety and returns, which is why they are attractive for people looking to park money without substantial risk.
What are Short Duration Funds?
This fund is a category of debt mutual funds. These funds invest in bond, government securities and other fixed-income instruments. These funds typically also have an average duration in the 1 – 3 year range.
This shorter horizon also limits interest rate risk versus long-duration funds. So, in times of market uncertainty, they are less volatile and more predictable.
Why Consider Short Duration Funds?
1. Lower Interest Rate Risk
Because those funds own bonds with shorter time horizons, they are less sensitive to rapid changes in interest rates.
2. Better Stability
As stock markets get volatile, they offer you a non volatile option to invest in.
3. Suitable for Medium-Term Goals
If you are looking to invest for 1-3 years, these funds would fit beautifully.
4. Tax Efficiency
If you hold them for more than three years, they are eligible for indexation benefits under long-term capital gains tax.
Who Should Invest?
- Investors seeking moderate risk.
- Investors who seek higher returns than bank fixed deposits but want lesser risk than equity funds.
- People who are saving for short term goals like a car, an exotic vacation or an emergency thumbnail corpus.
Risks to Keep in Mind
Although short duration funds are safer relative to the long-duration funds, they do not come without any risk. Key risks include:
- Credit Risk: The fund could lose money if the issuer of its holding defaults.
- Liquidity Risk: The fund might have trouble selling bonds rapidly when markets are under stress.
- Moderate volatility: The returns may vary, but not as much as in the case of equity funds or long-term debt funds.
Short Term Funds vs Fixed Deposits
On account of which, many investors compare these funds with fixed deposits (FDs). While FDs provide assured returns, short duration funds can offer higher returns. Plus, mutual funds offer superior tax efficiency over the long haul. But they are not risk-free like FDs.
Final Thoughts
In uncertain market conditions, short duration funds can make for a safe parking place for your money. They represent a good balance of stability and modest growth, not too riskless like parking cash or tying up money in long-term investments.
If you are aiming at the medium-term and want to take a little less risk without giving up a lot of returns, short-duration funds may make sense.
FAQs:
Q1. Are short duration funds safe?
They are comparatively safer than long duration debt funds, but still come with some amount of credit and market risks.
Q2. How long should I hold my investments in short duration funds?
Just try to sit in it for 1-3 years if you can.
Q3. Can short term funds have negative returns?
True, in the rare situations of large increases in interest rates or defaults on those bonds, there might be a modest negative return over short horizons.
Q4. Do they make more sense than fixed deposits?
They may provide better returns and tax benefits, but FDs have secured safety. It’s up to your risk appetite.
Q5. What is the tax treatment of short duration funds?
For holding less than 3 years, gains are taxed as per your income slab. If held for a period of 3 years, you receive the benefits on account of indexation.
