Short Term Debt Fund

Short-term Debt Funds are suitable for investors with an investment horizon of 1 to 3 years who seek capital preservation, moderate returns, and minimal interest rate risk. These funds appeal especially to those who:

• Want to park surplus funds temporarily.
• Are looking for better returns than traditional bank fixed deposits.
• Need liquidity without significant risk to capital.
• Prefer low to moderate risk exposure.

These funds are also helpful as part of a diversified debt strategy, helping to balance longer-duration or riskier debt funds in a portfolio.

Short-term Debt Funds are low- to moderate-risk investment vehicles. Because of their shorter average maturity, they carry limited interest rate risk, making them more stable during rate hike cycles. However, they can be exposed to credit risk, depending on the instruments selected by the fund manager.

Typical returns range from 6% to 7.5% annually, influenced by market conditions, credit quality, and interest rate trends. These funds offer good liquidity and lower volatility than long-term funds. This makes them a good choice for conservative investors.

From a tax view, profits on units held for under three years are short-term capital gains. The tax depends on the investor's income slab. If you have an asset for more than 3 years, the tax authorities tax long-term capital gains at 20%. This includes indexation, which helps maintain your post-tax gains at a higher level.

• Lower Volatility: These funds are less sensitive to changes in the interest rate due to their shorter maturity profile.
• Better Liquidity: Perfect for short-term financial goals or emergency funds.
• Capital Preservation: While not guaranteed, the risk of capital loss is minimal if high-credit-quality instruments are selected.
• Tax Efficiency: Holding investments for more than three years offers favorable tax treatment through indexation.

• Examine the credit profile of the instruments held—higher returns may indicate a higher credit risk.
• These funds are not suited for very short-term needs (less than 6 months); ultra-short or liquid funds may be better alternatives.
• Compare historical risk-adjusted performance and expense ratios before selecting a scheme.
• They may underperform in environments with sharply falling interest rates compared to longer-duration funds.