Debt mutual funds are often classified as per their holding period like short-term debt funds and long-term debt funds. The meaning of short-term debt funds is that they invest in debt and market instruments with a Macaulay duration of the portfolio between 1 year – 3 years. Short -term debt fund returns have low volatility..
Investors who are conservative or want to stay a particular portion of their assets in fixed income bearing securities can invest in short-term debt mutual funds. Debt funds, amongst themselves, have different risk profiles, which allows investors to settle on funds supported their risk appetite and return expectations in these funds.
Investors in debt mutual funds are exposed to inherent risks like rate of interest risk, credit risk, illiquidity risk and market risk etc. rate of interest risks ask the danger in your investment when prices of the securities purchased move up or down thanks to changes in macro-economic conditions like higher inflation, higher government borrowings, adverse effect on rupee thanks to higher accounting deficit and other global market developments. Credit risk refers to the danger , when the securities which the fund is holding get downgraded or when there’s an opportunity of the issuer of the safety defaulting in payment of principal or interest. Market risk refers to the danger of the underlying securities can’t be liquidated at the worth at which it’s valued, thanks to markets not being deep enough to soak up the sale of the securities.
Investors who want to stay their money for very short periods but trying to find slightly higher return than bank account and willing to require market risk may invest in Liquid Funds offered by mutual funds. These liquid funds are short term debt funds in nature and invest in Instruments which mature within 91 days.
So if your goal is for a really short period or if you’re investing during a different asset class otherwise you have almost reached your goal, it’s generally suggested to modify to debt funds as they’re less volatile than equity.
Mutual Fund investments are subject to plug risks, read all scheme related documents carefully.