These are schemes that invest in fixed income instruments of short durations. Short-term bond funds with less than one year duration are good investment options provided you have a one-year investment horizon. Lower average maturity of the fund ensures that the fund NAV is not hit much when short-term interest rates move up.
We expect the RBI to hike the policy rates by 50 to 75 basis points in this calendar year. That makes it a bit tricky for short-term bond fund investors.
Check the average maturity and exit load before you invest in a short-term bond fund. As a rule of thumb, the average maturity should be less than your investment time frame. Some funds do charge an exit load if you log out early. To avoid such a cut in the returns earned, it is better to check at what threshold of time the fund charges an exit load. The funds have a wide range of 'exit load' thresholds. Some charge an exit load if you were to redeem units within 90 days, while there are some that let you go if you are invested for at least one month. So study the scheme details carefully before investing.
Typically, a short-term bond fund manager prefers to maintain low average maturity. As the short-term rates are expected to climb further, the funds are expected to continue with the strategy. As the rates peak later this year, fund managers may choose to increase the average maturity of the fund, thereby further increasing the return potential for you. But as the short-term rates move up on the back of possible rate hikes by the RBI in the near term, the NAV of some of the short-term bond funds may come under pressure. If you do not want to take the risk, it is better to wait for some time and invest in a short-term bond fund post the rate hike.
If you want to wait till the next rate hike by the RBI, it is better to stay invested in a liquid or an ultra short-term bond funds. These funds are best positioned to benefit from the rising interest rates. This will ensure that the idle funds earn good returns in the meantime.
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Also, know how to buy mutual funds online:
1) DSP BlackRock Mutual Funds:
http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html
2) Reliance Mutual Funds:
http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html
3) Birla Sunlife Mutual Funds:
http://prajnacapital.blogspot.com/2011/06/buying-birla-sunlife-mutual-funds.html
4) UTI Mutual Funds:
http://prajnacapital.blogspot.com/2011/06/buying-uti-mutual-funds-online.html
5) SBI Mutual Funds:
http://prajnacapital.blogspot.com/2011/06/buying-sbi-mutual-funds-online.html
6) Edelweiss Mutual Funds:
http://prajnacapital.blogspot.com/2011/06/buying-edelweiss-mutual-funds-online.html
7) IDFC Mutual Funds:
http://prajnacapital.blogspot.com/2011/06/buying-idfc-mutual-funds-online.html
