Many people look forward to investing in different sectors. Mutual funds are one way to do that. However, in case you are confused about whether you should go for a long-term or short-term investment, stop right there. Because we’re giving you all the answers with this basic explainer on low-duration mutual funds.
Introduction to low-duration mutual funds
If you are going to invest your money for a short period, you may want to go for a short-term mutual fund. But what are they? Are they really worth it? And how do they work? Read on to find out.
How do low-duration mutual funds work?
Before you decide to invest your money in a short-duration fund, make sure that you are clear about how it works. First things first, low-duration mutual funds work within the time limit of 6 to 12 months.
When you invest in this type of mutual fund, you essentially invest in debt securities and money market instruments.
Who should invest in low-duration funds?
If you want quick returns and benefits, you can invest in low-duration funds. It will help if you have at least a short-term investment plan for 3 months in place. Also, your investment horizon should be near. Because the maximum term for these mutual funds is 12 months.
Taxation on low-duration mutual funds
Taxation is an essential factor to consider before making any investment. So also with low-duration mutual funds. You need to know that the returns are taxable. You don’t have to pay any tax for the dividends you receive, only the capital gain. According to Indian tax laws, that will be 15% of the profit—the short-term capital gain tax rate.
Risks associated with low-duration mutual funds
No matter what, if you invest in mutual funds, then there are going to be a few risks. While investing in a short-term fund, like a low-duration mutual fund, it’s important to understand the risks that arise due to the short duration of the investment.
You will face three different risks with this particular type of mutual fund:
- Interest rate risk
- Credit risk, and
- Liquidity risk.
Each of these factors—interest, credit, and liquidity—constantly fluctuates. That is why you can face these risks.
That said, check your portfolio before investing. It may turn out that you can easily choose a short-duration debt fund.
Things to consider before investing in low-duration funds
You need to know and consider a few factors before investing in short-term mutual funds.
- Debt issuer’s folio: First of all, make sure to check the folio of the debt issuer. This will help you to understand the risks involved better.
- Volatility: Secondly, these funds are prone to volatility, so make all the investments based on that
If you keep these two basic things in mind, you may be able to find yourself the best low-duration funds.
Advantages of investing in low-duration mutual funds
If you are going with low-duration mutual funds, there are a few advantages. Ideally, the returns are higher than the long-term capital gains. Also, you will receive the returns quickly. Next, there is the fact that you get some regular returns with interest and capital gains. Most importantly, your money will not get locked up for long, too, so you have some liquidity.
Now that you have understood low-duration mutual funds, you need to simply remember to consider all the risks. Your money is hard-earned, and you deserve that it remains safe while it earns you that extra income. We hope you do what’s right for you.
1. What are low-duration mutual funds?
Any mutual fund that holds money for a period of 6 to 12 months is a low-duration mutual fund. With this fund, you will begin to get returns within a year.
2. Which is the best short-term mutual fund?
There is no short-term mutual fund that can be labeled the best. It would, instead, help if you look into the risks, check the portfolio, and followed a mutual for some time. Of course, you will also be looking at the returns of that fund while choosing.
3. Where should you invest for a 3-month period?
If you are going to invest your money for 3 months, you can invest in short-term mutual funds or debt funding. You could also consider investing in the money market. Exchange-Traded Funds (ETFs) for gold and savings accounts in banks are also an option.