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Business News/ Money / Personal-finance/  What is a short-term debt fund?

A short-term debt fund is a mutual fund scheme that is meant for investments of about 1-3 years, though it works well even if you wish to invest for up to four years.

A short-term debt fund comes with a reasonable amount of risk and aims to give relatively stable returns. It is like an alternative for your fixed deposits (FDs) of equivalent tenures. However, if you hold a short-term debt fund for at least three years, it becomes more tax-efficient than an FD, though the funds are also riskier.

Some short-term funds were more volatile earlier because they used to invest in higher duration scrips. The good news is that new rules for the mutual fund industry don’t allow a short-term fund to take undue risks as it can only invest in scrips that have a duration of 1-3 years. While short-term debt funds can’t take excessive interest rate risks anymore, some of them can take credit risks.

During an asset allocation exercise for your portfolio, a short-term debt fund generally works well as a proxy for your debt component. Financial planners recommend that investors can take their share of risks in equity investments, but for debt allocation, low-risk instruments work well. So, a short-term debt fund fits in.

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Updated: 25 Apr 2018, 08:58 AM IST
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