Debt mutual funds
Debt mutual funds are divided into two categories based on their holding period: short-term debt funds and long-term debt funds. Short-term debt funds invest in debt and money market securities with a Macaulay duration of the portfolio ranging from one to three years. Returns on short-term debt funds are quite stable.
Short-Term Debt Mutual Funds
Short-term debt mutual funds are a good option for conservative investors who want to keep a portion of their assets in fixed-income instruments. Debt funds have diverse risk profiles, allowing investors to select funds based on their risk appetite and expected returns.
Debt mutual fund investors are exposed to risks such as interest rate risk, credit risk, illiquidity risk, and market risk, among others. Interest rate risks refer to the risk that your investment will lose value due to changes in macroeconomic conditions such as increased inflation, higher government borrowings, a negative impact on the rupee due to a higher current account deficit, and other global market developments.
Credit risk refers to the risk that the securities that the fund owns will be downgraded or that the issuer of the security will default on principal or interest payments. Due to markets not being deep enough to absorb the sale of the assets, market risk refers to the risk that the underlying securities will not be liquidated at the price at which they are valued.
Liquid Funds given by mutual funds are suitable for investors who wish to hold their money for a short length of time but want a little greater return than a savings account and are willing to incur market risk. These liquid funds are short-term debt funds that invest in instruments with a 91-day maturity.
If you have a short-term goal, are investing in a different asset class, or are close to reaching your goal, it is generally recommended that you move to debt funds, which are less volatile than equity funds.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.