Are Short Term Funds A Feasible Investment Option?

A short term fund is a debt mutual fund that invests in commercial papers, bonds, certificates of deposits and other such fixed income securities that have a short maturity period.

Short Term Funds offer the option of SIP and lump sum investment. Those who have lump sum money sitting idle which they recently inherited can invest in short term funds by making a one time lump sum investment. A lump sum is a one time investment that an investor has to pay at the beginning of the investment cycle. One good thing about lump sum investment is that investors are allotted units in small quantities.

On the other hand, a Systematic Investment Plan is a new and convenient way to invest in short term funds. Investors can now invest a small amount at periodic intervals instead of paying the entire investment amount at one go. This way investors get allotted units depending on the fund’s NAV which may increase or decrease from time to time, thus benefiting from rupee cost averaging. With SIP all one has to do is complete a one time mandate with their bank following which every month on a fixed date, a predetermined amount is debited from their savings account and electronically transferred to the short term fund. Investors decide how much to invest provided the figure fulfils the minimum investment amount. Investors those who are new to mutual fund investing can also refer to SIP calculator, a free online tool to help them get a rough estimate of how much capital appreciation they can possibly generate if they continue investing a certain amount for a stipulated period of time.

What makes short term funds a feasible investment option?

If you wish to invest a certain amount that is sitting idle and generate capital appreciation from that money, you can consider investing it short term funds. Short term funds are less volatile in nature as compared to equity funds. While equity funds are ideal for generating capital gains over the period of seven to ten years, short term funds can help investors target short term financial goals like renovation of their home or their child’s school fees or making the down payment of their new luxury car. Debt funds like short term fundsgenerally invest in high quality papers which allows participation in the short term part of the curve which is a large and highly traded space. A short term fund aims at generating capital appreciation by investing in shorter duration debt and money market instruments which hold the potential to generate relatively steadycapital gains with comparatively lesser risk.

Things to consider before investing in short term funds

Although short term funds aren’t as volatile as equity funds, they do carry interest rate risk and credit risk. Hence, investors need to discuss all the possible pros and cons about short term funds with their financial advisor before investing.Investors are expected to do some background check about the fund before investing.They can check for the fund’s existing NAV (net asset value) and also understand the expense ratio that will be levied on them when they invest. It is always a good idea to invest in a reputable fund house with a high expense ratio bearing short term fund rather than investing in a fund with a low expense ratio that is offered by an unrecognized fund house or AMC. Also, investors should discuss their goals with their financial advisor to help them understand if a short term fund can fit in in their investment portfolio.

Short term fund can be an ideal investment tool for anyone who wishes to add a debt element to their mutual fund portfolio or someone who is switching from traditional investment avenues and carries a moderate or low risk appetite.