Liquid Funds: It invests in securities like Treasury Bills issued by RBI, Certificate of Deposits by
banks, etc. They invest in securities whose maturity is less than 91 days. Hence they are less
risky instruments in short term when compared to short term funds.
Ultra short-term funds: is an another category whose average maturity is higher than liquid
funds. They are suitable to invest with a 3 month horizon to a year.
Short Term Funds: Along with the above discussed instruments it also invests in other
instruments like NCD’s , Debentures, Commercial Papers, etc. The average maturity of these
papers ideally ranges in between 2-3 years.
As these instruments marked to market on daily basis any changes in interest rates, credit
profile of the instruments will have an impact either positively or negatively.
As discussed with many of you debt funds in India still provide attractive returns compared to
many other countries like US, Japan etc and it has a key role to play in one’s asset allocation.
No market related instrument is risk free be it equity or debt in the short term.
In July 2013 in order to arrest continuous slide in weakness of rupee RBI has taken some steps
which impacted the returns from debt funds in shorter period.
In that period even ultra short funds given a negative return for a day or two, which recouped
those losses in next couple of days. These are Black Swan events. An example of such events is
2008 US subprime crisis and 2013-rupee depreciation. As an investor one need not get panic
with such kind of news and take wrong decision.
Easy way to invest in debt is based on your time frame. For a month consider liquid , beyond
a month to 3 months-ultra short term ; and as an alternative to bank fd’s invest in short term,
corporate funds etc. I'm attaching a comparison sheet explaining how debt funds score over
bank fd's with the same interest rate assumption.
Hope you find it useful.