Savings accounts and fixed deposits have been the traditional instruments for parking money for the short term. While these are safe options, most investors tend to overlook their shortcomings.
For instance, when you look for decent returns, you need to lock in fixed deposits for a specific tenure, like 5 years. Savings accounts, on the other hand, offer a low rate of interest.
This is why investors are gradually turning to debt mutual funds. While these funds offer liquidity, you get competitive returns compared to savings accounts or fixed deposits. You can park your funds for the short term, maybe three months or two years, in some of the best debt instruments to ensure stability and a steady income.
In this blog, we’ll discuss why debt funds are a great choice for short-term investments.
What are Debt Funds?
Debt funds are a type of mutual fund that invest primarily in fixed-income instruments like government bonds, treasury bills, corporate bonds, and money market securities. They provide stability and a steady income while ensuring liquidity, which makes them ideal for conservative investors.
Even if you’re waiting to invest in equities later, parking your capital in a debt fund can fetch you stable returns. Debt funds don’t depend on swings in the stock market for returns. This makes them different from equity funds. Debt mutual funds generate income through interest payouts and capital appreciation of debt instruments. As a result, they are less volatile and predictable.
Short-term investors find debt funds particularly attractive since they offer the flexibility of mutual funds along with the stability of traditional debt instruments. In short, they bridge the gap between equities delivering high returns and ultra-safe savings.
Key Reasons Why Investors Must Choose Debt Funds for the Short Term
If you’re planning to invest in MF, here’s why debt funds can be a suitable choice for the short term.
- Low Risk
In the short term, investors generally have a relatively low risk profile. Since debt funds allocate your assets into instruments that are backed by the government or reputed corporate firms, the risk of default is minimal.
Also, debt funds have a lower exposure to the volatility of equity markets. When the investment horizon is just a few months, this stability is crucial for preserving your capital.
- Liquidity
Short term investment goals like creating an emergency fund or travel funds require liquidity. Debt funds are a decent choice since you can redeem your money at any time. Usually, the settlement period is just 1-2 business days.
You also have options like overnight funds or liquid funds that provide near-instant access to your money. This ease of entry and exit makes debt funds one of the most convenient avenues to park your surplus.
- Better Returns than Savings
Savings funds usually offer low returns, ranging from 2% to 4%, that barely beat inflation. On the other hand, short-term fixed deposits offer slightly better returns. However, they often come with penalties in case you decide to withdraw the amount before maturity. With debt funds, investors enjoy higher returns over the same period.
- Diversifying Portfolio
If you’re planning to diversify your portfolio, including debt funds in the equation makes sense. These funds stabilize the risk and volatility associated with equities. When you allocate a portion of your money to debt instruments, you get a cushion against volatility.
Debt funds like liquid or ultra-short funds ensure you’re not overtly dependent on any one asset class.
Conclusion
Debt funds should essentially be a part of short-term investment portfolios, considering their low risk, high liquidity, and decent returns. You may be parking your idle cash or investing for a short-term goal.
In any case, these funds are a reliable and efficient tool that keeps your money working without the risk of equity funds. Strike the right balance between safety and returns with the right debt mutual fund in your portfolio.
