Money should never be left idle. Investors should always look to derive best possible returns from whatever money they have in hand.
Though most investors give a serious thought while investing for the long term, they sometimes overlook this when it comes to the short term. A careful analysis of the available options can lead to significantly higher returns even when one is looking to park money for a short period of time.
In mutual funds, there are two suitable options — liquid funds and low duration funds. Both are debt funds and hence are similar in most aspects. The major difference is the average maturity of the underlying assets. While securities of liquid funds have a maturity of less than 91 days, the underlying assets of low duration funds have a maturity of 6-12 months.
There's also a difference in the type of securities held. Liquid funds invest in Treasury bills, commercial papers and certificate of deposit. Low duration funds, on the other hand, invest in high rated corporate and government bonds.
Liquid funds are considered by many as the go to option for short term investment. But low duration funds are in no way inferior when it comes to investing with 6-12 months' view. In fact, it even beats liquid funds in certain aspects.
The returns offered by low duration funds are higher as compared to liquid funds. The difference may not be very high but is often enough to ensure that the return is higher than the inflation rate.
"They (low duration funds) have higher flexibility when it comes to rating portfolio. At a time when the short-term rates are so low and yield curve is steep, it helps. If someone has an investment horizon of 6-9 months or 6 months to one year, then low duration fund is better than the liquid fund," said Mahendra Jajoo, CIO-Fixed Income, Mirae Asset Investment Managers (India) Pvt. Ltd.
The higher returns indeed come at the cost of slightly higher risk, but the fund remains a good option even for those with low-risk appetite.
These funds are an excellent choice for those looking to park money for systematic transfer plan (STP). The option ensures good short term returns along with the benefits of SIP in debt funds.
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