What are short-term mutual funds, and how to benefit from them?

U.S. Stocks. Which ones to Buy in 2023? short-term mutual funds

Investors have unique needs. They might invest to achieve a long-term goal or find an asset to park their money for a few weeks or months safely. Short-term mutual funds are excellent for investors chasing the latter. Short-term mutual funds are open-ended investments in securities with a maturity of between 15 days and three years.

Short-duration debt funds can be especially beneficial for low-risk investors. These funds invest in money market securities, not equities, to earn returns, making them perfect for risk-averse investors.

If you, as an investor, want to invest in funds with the shortest possible duration, you can opt for an overnight fund or liquid fund. These are some of the preferred short-term debt funds for parking your exigency fund. Along with capital preservation, liquid funds may also offer satisfactory returns. If you want to invest in a short-term fund with a maturity period between 3-6 months, you can go for an ultra-short-duration debt fund.

Once you are familiar with what a short term fund is, the next step is to understand the benefits of investing in it. Read on to understand the benefits of investing in short-term debt funds.

Benefits of investing in short-term debt funds

When choosing an investment product for your short-term life goal, you often focus on three critical aspects. The primary aspect is capital preservation, meaning the money you put in does not hold any speculative risks. The second aspect is liquidity, i.e., whenever you require the parked funds, you must be able to redeem them. The third aspect infers return potential, meaning the fund must generate a satisfactory return.

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You can get these benefits with short-term debt mutual funds. The important short-term debt funds you can invest in to meet your short-term goals are liquid funds, low-duration debt funds, ultra-short-duration debt funds, short-duration debt funds and money market funds. Important benefits of short-term funds are:

1. Capital protection

As a short-term debt fund invests in fixed-income assets like deposit certificates, corporate bonds, and government securities, they can yield satisfactory returns compared to fixed deposits and simultaneously preserve your capital in the short term. Thus, consider investing in short-term debt mutual funds if you want an investment option that ends capital preservation with high returns compared to Public Provident Funds (PPF) or fixed deposits (FDs).

2. Liquidity

Liquidity is the next important consideration checkpoint to selecting a short-term fund. As a short-term goal usually spans up to three years, you would look for an investment product that permits you to redeem your investments according to your short-term financial goals’ time horizon. Short-term debt funds like low-duration, overnight, liquid, short-duration, ultra-short-duration, etc., allow instant liquidation owing to their short maturity periods.

3. Return potential

The last important selection parameter is the return potential. Satisfactory returns are key, apart from capital preservation, whenever you invest your funds. As short-term debt funds invest a massive corpus in market-linked fixed-income products, you may gain higher returns than a fixed deposit or savings account if you choose the debt scheme well.

Short term mutual funds are a prudent choice to meet your short-term financial life goals. As such funds invest in fixed-income assets and securities like treasury bills, corporate bonds, G-secs, etc., they have the potential to earn higher returns. Besides offering higher returns, short-term debt funds can also provide high liquidity and capital protection features.

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