The concept of short-term investing is still not prevalent among Indian investors. We generally invest or switch to short-term debt funds when returns from income funds turn sour. This is not the right approach to short-term investing. Since uncertainty is a constant component of our economic universe, we should consider different investment avenues for different time periods. A cash fund makes sense for near-term needs, i.e., if you have idle cash for one-week to three months. A short-term debt fund is a debt scheme that aims to achieve stable returns over a shorter investment horizon, while simultaneously preserving capital. In the past one-year, short-term debt funds have delivered a decent return in the range of 3.19-4.34 per cent. For the six-month period, the returns lie in 1.14-2.36 per cent range. Most short-term funds have given better returns than the bank savings account rate of 3.5 per cent.
The Investment Universe
Short-term debt funds invest majority of their portfolio in corporate bonds and commercial papers (as much as 70-80 per cent). Commercial papers are short-term debt instruments of a short maturity, usually less than one year, issued by companies. These are liquid instruments and are frequently traded. The corporate bonds held by these funds usually have a residual maturity of one to one-and-a-half-years.
Though majority of funds prefer AAA-rated corporate bonds but few also dabble in bonds rated below this level to benefit from higher interest rates. For example, in the past one-year, funds like LICMF Short-term, Kotak Bond Short-term, JM Short-term, HDFC High Interest Short-term have an average 20 per cent allocation to below AAA-rated bonds. On the other hand, UTI Liquid Short-term Regular and Grindlays SSI Short-term funds' exposure to low rated bond is minimal (below 10 per cent). Interestingly, Alliance Short-term and Tata Short-term Bond have always invested in AAA-rated bonds in the past one year. Government securities have a limited role in a short-term debt fund's portfolio as the average maturity has to be kept low. In past one-year, these funds' average allocation to such securities has been below 10 per cent.