What are Short/Medium-Term Debt Mutual Funds?

Debt funds are an excellent investment option for risk-averse investors who are not comfortable with equity funds' higher volatility. But even within the debt funds category, there are many different types of funds to ensure a fund for every investor.Two of the most popular types of debt funds are short-term and medium-term debt funds. Take a look at what these debt funds are and who should invest in them-

To understand these popular types of debt funds , you should first understand what debt funds are. Debt mutual funds invest your money in securities that generate fixed income. Corporate bonds, treasury bills, government securities, and commercial papers are some of the securities in which debt funds invest.All of these securities have a fixed maturity date. Based on these maturity dates, debt funds are divided into long-term, medium-term, and short-term debt funds. Talking about short-term debt funds, the securities in their portfolio have a maturity ranging between 1-3 years. Similarly, medium-term debt funds have securities that will mature within 3-5 years.

Short and medium-term debt funds are known to generate higher returns than traditional investment options such as bank FDs when the interest rates in the country continue to remain stable or fall. Moreover, as these funds invest in securities maturing between 1-5 years, the economic cycles do not impact these funds as much as long-term debt funds.Another considerable advantage is their tax-efficiency compared to bank FDs if you are investing for 3 years or more as these funds come with indexation benefit.

Short and medium-term mutual funds are an ideal alternative to bank FDs if your investment tenure is 3 years or more. Conservative investors can also consider these funds due to the minimum amount of risk they come with.Moreover, these debt funds are also an excellent diversification tool for adding more balance to your investment portfolio.

Thanks to all the different types of debt funds now available, investors can now pick funds that effectively match their risk appetite, investment horizon, and objective. If you are planning to invest in debt funds, do consider short or medium-term debt funds for their shorter investment tenure.If you are new to mutual funds, an experienced advisor can help you create a portfolio that aligns with your investment objectives.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.