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Looking to park money for the short-term? Here are your options

Tuesday January 26th, 2021
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Looking to park money for the short-term? Here are your options

Investments can be classified as short-term and long-term – depending on the time horizon for your goal. Typically, a short-term goal would be one that is up to three years away. Some instances of a short-term goal could be paying for your child’s school fees within one year or making a down payment for purchasing a house within three years. In both cases, you know exactly when you need the money and how much. Hence, you must plan your investments in such a manner that the funds are available when you need them.

  • Debt Mutual Funds – Certain sub-categories of debt mutual funds can help you address your short-term needs and ensure liquidity. One of the objectives of a debt mutual fund scheme is to earn a steady and regular income for investors. That said, the investment objective, risk, and the returns vary on the types of debt mutual scheme you choose.

For short-term needs, the six categories of debt mutual funds that you may consider are:

1. Overnight Fund – For very short-term horizon, say a day, to a week, to a fortnight, to a month, this sub-category of debt mutual funds can be considered. According to SEBI’s classification norms, an Overnight Fund is mandated to invest in overnight securities that have a maturity of 1 day. These are typically money market instruments viz. Treasury bill (T-Bills), Tri-Party Repos (TREPS), Reverse Repos, etc.

An Overnight Fund commands a very low risk-very low return investment proposition.

2. Liquid Fund – A Liquid Fund is mandated to invest in debt and money market securities with a maturity of up to 91 days. For instance, money market instruments such as Certificate of Deposits (CDs), Commercial Papers, Term Deposits, Call Money, T-Bills and so on.

A Liquid Fund entails low risk; it is placed at the lower end of the risk-return spectrum vis-à-vis other debt mutual funds. A Liquid Fund is suitable if you have a low-risk appetite, prefer safety and liquidity over returns, and have an investment time horizon of 1 month to 3 months, or a little more.

3. Ultra-Short Duration Fund – This sub-category of debt mutual fund invests in instruments with higher duration as compared to liquid funds. An Ultra-Short Duration Fund is mandated to invest in Debt & Money Market instruments with an average duration of between 3 months to 6 months.

When compared to a Liquid Fund, the Ultra-Short Duration Fund exposes you to slightly higher risk, since the underlying portfolio of the fund is in relative higher maturity debt papers. That being said, the return potential is a tad better than a Liquid Fund.

If you have an investment time horizon of anywhere between 3 to 6 months, or slightly more; an Ultra-Short Duration Fund may be considered.

4. Low Duration Fund – This is a variant of the short-term debt fund that invests in debt and money market instruments such that the average duration of the portfolio is between 6 months to 12 months. It holds slightly longer maturity debt papers in comparison to an Ultra-Short Duration Fund.

Thus on the risk-return spectrum, a Low Duration Fund is placed a little above an Ultra-Short Duration Fund; because the slightly higher maturity increases the duration risk to its portfolio as well. Hence, if you have an investment time horizon of up to a year, you should consider a Low Duration Fund.

5. Money Market Fund – As the name suggests, a Money Market Fund invests in Money Market instruments having the maturity of up to 1 year. The instruments include Certificate of Deposits (CDs), Commercial Papers, Term Deposits, Call Money, Treasury Bills and so on. Thus, on the risk-return spectrum, indicatively a Money Market Fund is placed above a low duration fund.

If you have an investment time horizon of up to a year, this sub-category of debt mutual funds may be considered. These funds have the potential to give superior returns to an FD.

6. Short Duration Fund – These debt funds invest in debt and money market instruments such that the average duration of the portfolio is between 1 and 3 years.

Compared to a Low Duration Fund, the maturity profile of the debt portfolio is longer while it invests in a variety of debt papers: corporate bonds/debentures, government securities, and money market instruments.

Thus, on the risk-return spectrum, a Short Duration Fund is placed two levels above a low duration fund. It is suitable if you have a low-to-moderate risk profile.

Do note that investments in debt mutual funds are not absolutely risk-free. Debt mutual funds typically attract interest rate risk, credit risk (also known as default risk), portfolio concentration risk, and liquidity risk. The returns earned on a debt mutual fund are market-linked. The performance of the funds depends on the quality of debt papers and money market instruments they hold in the portfolio. Hence, scheme selection plays a pivotal role.

Axis Bank offers a choice of top debt mutual funds. Visit the mutual funds section on our website to select one that meets your requirements.

Bank Fixed Deposit – A bank FD earns an assured rate of interest, addresses liquidity needs, helps in contingency planning, and achieving short-term financial goals. From an asset allocation and diversification standpoint, you may hold some money in fixed deposits.

At Axis Bank, you can book your bank FD with a minimum of Rs 5,000 for a flexible tenure starting from a minimum of 7 days to a maximum of 10 years. This can be done online. Axis Bank offers an attractive rate of interest on bank FD to enable wealth creation.

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