Do you know about short-term debt funds?

New Delhi: In keeping in line with the intent of having a stable economy, the RBI focus on ensuring the stability of its interest rates. When this happens for an extended period of time, short-term debt funds have a better chance of outperforming medium and long-term funds. These funds are primarily intended for low-risk investors seeking a consistent stream of income from securities that are not affected by the bond market's frequent swings. Not many people are aware of the key benefits of investing in these kinds of benefits. Experts advise investors to choose high-quality debt funds with AAA credit ratings, such as the IDFC Bond Fund and the Kotak Short-Term Fund (STF).

Continued security

Short-term funds typically invest in debt and money market instruments such as certificates of deposit (CDs), corporate bonds, debentures, treasury bills, and government bonds. However, these investments are made for a maximum of one to three years.

These funds' returns are primarily derived from the interest earned on bonds/debt. When compared to medium and long-duration funds, these funds have a better chance of profiting from interest rate increases. Investors with a one to three-year horizon who are concerned about rising interest rates should consider investing in short-term debt funds due to the attractive yield-duration combination these funds provide.

Short-term debt funds are less vulnerable to value loss in rising interest rate environments. Bond yields rise when the central bank raises interest rates, and bond prices fall as a result.

Be careful while investing

Before proceeding to invest in short-term debt funds, review the returns on these funds in the past five to 10 years. You must follow this process before making any small or large investment in any mutual fund. Mutual fund historical returns provide a good indication of how the portfolio has performed in the past. This can be interpreted as a predictor of future performance.

Aside from historical returns, check the creditworthiness of funds using credit ratings of debt instruments of constituent securities. Sovereign debt papers and debt securities with AAA ratings, for example, are more reliable than those with poor ratings. So, in the case of stable interest rates, investors can consider investing in short-term debt funds to earn higher returns in the event of future rate hikes.