A quick take on short-term debt funds

Short-term debt funds, also referred to as short-term income funds, allow an investor to invest their wealth for a short duration and provide easy accessibility. 

With a maturity period of one to three years, short-term debt funds invest in debt-related instruments and fixed-income securities in government and corporate bonds such as commercial papers, bank papers (certificate of deposits), floating rate bonds, and debentures, among others. 

A shorter maturity period makes such mutual funds less susceptible to changes in interest rates. For those with an investment horizon of one year, these debt funds remain an ideal choice for meeting short-term requirements. 

For example, if there is a need for paying school fees, insurance premiums, or generating funds for a family vacation, then short-term debt funds could be considered as they offer reasonable returns with low risk.

The option of dividend payments is available in short-term debt funds. Investors can look forward to earning regular dividends, which could be fortnightly or monthly. An investor can withdraw debt fund investments within two working days. However, individual investors are required to pay the Dividend Distribution Tax (DDT) of 25%.

Essentially, debt mutual funds usually invest in securities that have high credit ratings and a proven track record. It is prudent for an investor to always check the credit ratings of bonds and debt instruments in which the mutual fund is investing.

However, there are a few aspects that need to be taken into account before zeroing in on that ideal debt fund. Factors such as time horizon, investment objective, and the current interest rate scenario should be considered before choosing any fund that suits an investor’s need.