I am looking to park my money for the short term (say six months to a year).

I want to keep this money out of equity and perhaps in the debt sector, thus reducing my exposure to the all-time high markets (in case of a market crash).

I am looking for some MFs which would pay more than a liquid fund but at the same time not lose money.

I parked my money in Axis Short Term Fund and ICICI Prudential Short Term Fund to try them out (between June 6 to July 2, 2021), both of which decreased in value.

I have two queries please and would really appreciate your advice.

1. How do short term funds lose NAV if they are investing in debt securities? I perhaps am not understanding how they work.

2. Any advice on a suitable mutual fund which will meet my objectives. I understand this will be pure advice and I will invest on my own risk.

Ans: For investments for 1 year debt is better option and the categories that can be considered is Low duration fund; Risk of these funds are Moderately Low

Few funds that can be considered are as under:

Hdfc Low Duration Fund - Retail - Regular Plan - Growth

Aditya Birla Sun Life Low Duration Fund - Growth-regular Plan

Hybrid – Aggressive i.e SBI Equity Hybrid Fund Regular Growth has moderately high risk and better fund in this category is Canara Robeco Equity Hybrid Fund Regular Growth

Ans:

Please be informed, that the Equity oriented schemes (Equity / Hybrid) come under high to very high risk categories and not moderate. Therefore, Hybrid balanced advantage can only be considered which has moderately high risk.

1. ICICI Pru Balanced advantage fund - Growth
2. Union Balanced advantage fund -- Growth
3. Tata Balanced advantage fund growth

For 6 to 12 months you may look at low duration funds as under:

1. Icici Prudential Savings Fund - Growth
2. Aditya Birla Sun Life Low Duration Fund - Growth-
3. Hdfc Low Duration Fund - Retail- Growth

Ans: For short-term liquidity needs with capital protection as a priority, investing in liquid and ultra-short duration mutual funds can be a suitable option. Here are three categories of funds along with recommendations:

Less than 1 month:
Liquid Funds: These funds invest in very short-term money market instruments with a maturity of up to 91 days, ensuring high liquidity and stability.
Recommended Fund: Axis Liquid Fund, ICICI Prudential Liquid Fund, Aditya Birla Sun Life Liquid Fund.
1-6 months:
Ultra Short Duration Funds: These funds invest in debt and money market instruments with a slightly longer duration than liquid funds, typically up to 6 months.
Recommended Fund: Kotak Savings Fund, HDFC Ultra Short Term Fund, SBI Magnum Ultra Short Duration Fund.
More than 6 months:
Low Duration Funds: These funds invest in debt securities with a maturity between 6 months to 1 year, providing relatively higher returns than liquid and ultra-short duration funds.
However, it's essential to review the specific schemes offered by these fund houses and consult with a financial advisor to ensure they align with your investment goals and risk tolerance.

Ans: You may invest remaining 5K in Mirae Asset Large & Midcap fund

A quant fund is a type of mutual fund that uses pre determined algorithms to arrive at an investment decision. Their is no scope for human judgement in it. These funds may be good ideally but we live in a imperfect world.

I prefer to have an actively managed fund where the fund manager uses his discretion to read between the numbers and take judicious investment call.

*Investments in mutual funds are subject to market risks. Please read all scheme related documents carefully before investing

Ans: Your question highlights an important choice for short-term investments. Both Fixed Deposits (FDs) and Low Duration Mutual Funds (MFs) are viable options. Each has unique advantages and suitability for different goals and preferences. Below, I’ll provide a detailed analysis of both to help you make an informed choice.

1. Safety and Stability
Fixed Deposits: FDs offer guaranteed returns. They provide fixed interest, making them stable and secure. This makes FDs highly reliable for risk-averse investors. The deposit insurance up to Rs 5 lakh adds extra security.

Low Duration Mutual Funds: These funds invest in debt securities with short maturity. Returns fluctuate slightly based on interest rate movements but are generally stable. While they are low-risk, they carry a slight market risk due to interest rate changes.

2. Potential Returns
Fixed Deposits: FDs typically offer returns between 6% to 7%, depending on tenure and bank. While stable, they might not outpace inflation over the long term.

Low Duration Mutual Funds: These funds have the potential to offer slightly higher returns than FDs. Historically, returns range from 6% to 8%, though past performance doesn’t guarantee future returns. Their returns are not fixed and depend on prevailing market interest rates.

3. Liquidity and Flexibility
Fixed Deposits: FDs can be liquidated, but they usually have penalties for premature withdrawal. Partial withdrawals are generally not allowed, meaning the entire deposit may need to be closed. This could limit liquidity if funds are needed urgently.

Low Duration Mutual Funds: Low duration MFs are more liquid. Redemption is simple, and the funds are usually credited within a day or two. This makes them ideal if you anticipate the need for quick access to funds. However, check for any exit load, as some funds may charge a small fee for early withdrawal.

4. Tax Implications
Fixed Deposits: Interest earned on FDs is fully taxable according to your income tax slab. This taxation reduces the effective return, particularly for individuals in higher tax brackets.

Low Duration Mutual Funds: Gains from low duration MFs are taxed based on your income tax slab if redeemed before three years (short-term capital gains). For holding beyond three years, long-term capital gains tax is applicable, with indexation benefits. This taxation difference can make MFs slightly more tax-efficient if held for the medium term.

5. Inflation Protection
Fixed Deposits: With fixed returns, FDs might not keep pace with inflation over time. Their real returns (after adjusting for inflation) could be lower, affecting purchasing power.

Low Duration Mutual Funds: Due to their exposure to market-based returns, low duration MFs may better adjust to changing interest rates. They have a higher chance of outpacing inflation, providing better real returns over 12-18 months than FDs.

6. Investment Horizon Suitability
Fixed Deposits: FDs are ideal for short-term goals if stability and security are priorities. If you’re highly conservative and prefer fixed returns, FDs might be suitable.

Low Duration Mutual Funds: If you can handle slight market fluctuations, low duration MFs can provide competitive returns. They offer the potential for slightly better returns than FDs, along with better liquidity.

7. Expenses and Charges
Fixed Deposits: FDs don’t involve any charges apart from possible penalties on premature withdrawals. This makes them straightforward and cost-effective.

Low Duration Mutual Funds: MFs incur a nominal expense ratio, generally between 0.3% to 0.5%, for fund management. This cost is often covered by the fund’s returns but should be factored in as part of your investment planning.

Final Insights
For short-term investment over 12-18 months, FDs are best for stability and predictability. However, if you seek slightly higher returns and are comfortable with minimal risk, low duration mutual funds could be a good option. Reviewing your risk tolerance and goals will guide you in choosing the right path.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment