Investing as per your financial goals is essential as it helps you get a clear perspective on how much and where to spread your investments. Diversification is the key and one must not depend on only one asset class for income generation. If you are only investing in equity, you can shift 20 percent of your investments in debt assets.
Debt funds are mutual fund schemes that invest in fixed securities that generate regular income. Although debt funds are not known for offering higher capital appreciation like equity schemes, they can assure stable income with minimum investment risk. That’s because a debt fund generally invests in debt instruments like treasury bills, corporate bonds, G-sec, company fixed deposits, etc. A debt fund’s investment objective to offer consistent returns and not high returns. Since the interest rate on these debt instruments is predetermined, debt funds are familiar for accruing stable income.
Which funds to choose for short term goals?
Short Term Funds
Short term funds are debt schemes that invest in fixed income securities in such a way that the Macaulay duration of the scheme is between one to three years. The investment objective of a short term fund is to offer capital appreciation with moderate investment risk. Investors looking to diversify their mutual fund portfolio can consider investing in short term funds. Short term funds are generally considered by those keen on parking their money over the short term. One can even target short term goals like building a corpus for short vacation or for renovating their home.
Liquid funds are open ended debt schemes that invest in debt instruments that have a maturity period of 91 days. This makes them less volatile to credit risk. Liquid funds do not have a lock-in period which makes them feasible for investors seeking liquidity in assets. Some AMCs even offer instant redemption where the liquid fund units are immediately liquidated and are transferred to the investor’s linked savings account. Liquid funds do not possess any threat from equity markets, thus making them less volatile in nature. Mutual fund investors generally aim at liquid funds to build a medical fund or an emergency fund because of the scheme’s nature of offer immense liquidity.
As the name suggests, overnight funds invest in securities that mature overnight. This is why these funds are considered by investors who wish to park their money for a very short term. Overnight funds carry almost zero interest rate risk as these schemes invest in overnight securities. Those seeking to park their money for a very short period can consider investing in overnight funds.
Things to consider before investing
There are several debt schemes which might help investors achieve their life’s short term goals. Hence, understanding your risk appetite, investment objective and investment horizon is essential before investing in debt schemes. Even though debt funds are aloof of equity market volatility, they do carry credit risk and interest rate risk. Investors must not depend on only one asset class and seek diversification my investing across asset classes.
Mutual fund investments do not guarantee capital appreciation. The investment objective of the scheme must align with that of the investor. One can even do a background check on the scheme before investing. Make sure that you invest in a mutual fund that is managed by a reputed fund house. Also, take into account the fund’s past performance to understand its level of consistency in terms of generating stable returns. If needed, consult a financial advisor who might help you make an informed investment decision.