Returns on bank fixed deposits have been falling for some time now and as is the norm now of slowing economy and as iterated by the RBI governor in the last monetary policy review who said that rate cut path shall be continued until growth picks up, we may see further lowering down in FD rates in line with key policy rate.
And in its view taking taxation and other parameters, financial planning advisors have been suggesting investors take the shelter of short term mutual funds now referred as duration funds that came into existence after SEBI's rationalization and categorization of mutual funds.
Typically, short duration schemes are open-ended short-term debt schemes that invest in instruments with a duration of between one and three years.
The idea of duration funds is however different from tenure and it implies that in what time the investor can recover the principal amount invested that includes the impact of interest received. The whole idea is based on asset-liability matching. So, for better returns, tax efficiency and low-risk exposure, if an individual has an investment horizon of 3 or more years, one can take on to short or medium-term duration funds instead of bank FDs.
So, based on few of the parameters consistency of returns in the last 3 years, outperformance and downside risk, here are suggested few short term mutual funds that you can invest in with a horizon of 3 or 4 years.
1. HDFC Short term debt fund: HDFC Short Term Debt Fund-Growth suggests an investment horizon of less than 3 years. Annualised return for last one year stands at 10.03%. The fund invests 96% in debt and the rest 4% in other securities. NAV of the debt fund as on October 16, 2019, is 21.72. At the same time, 3-year return from the instrument has been at 7.62%.
2. ICICI Prudential Short term fund: The suggested time horizon typically in this fund is also less than 3 years. The mutual fund has been rolled out with an objective to offer maximum income while maintaining the optimum balance of yield, safety and liquidity. The moderate risk bond fund's annualized return for last 1 year had been 9.87%. While its NAV as on is 40.58 as on October 16.
3. Axis short term fund: The scheme can earn better returns than FDs on an average. Its one-year annualized return has been 10.2%, implying Rs. 50,000 turned into Rs. 55,108. Its NAV as on October 17 has been at 21.07. The scheme has 100% exposure in debt instruments. 3-year return from the instrument has been at 7.3% per annum.
4. Reliance Short term fund: The primary investment objective of the scheme is to generate stable returns for investors with a short term investment horizon by investing in fixed income securities of a short term maturity. With moderately low risk, the fund yielded 10.1% in the last one year and its 3-year annualized return stands at 6.72%.
5. Aditya Birla Sun Life Short term Opportunities Fund: It is An open-ended Income scheme with the objective to generate regular income by investing primarily in investment-grade fixed-income securities/money market instruments with short to medium-term maturities and across the credit spectrum within the universe of investment-grade rating. With moderate risk and NAV of Rs. 32.54 as on October 16, the annualized one-year return from the fund is at 9.9% while in a 3-year term it has fetched a return of 7%.
Also, here in i.e. in the case of short term or duration funds the liquidity aspect is good i.e. high and unlike bank FDs, these do not charge a penalty for early redemption.