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How to invest in Debt Mutual Funds for a short period

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THERE has been a rise in the returns by liquid funds and ultra short-term funds in recent times as the interest rate on short-term borrowings have spiked. The question for investors is the manner in which they should be looking at this situation and how they can actually go about the process of investing for the short term, as there are various options that are available for them. A look at the conditions and the features that are present here would give a better picture as to how the entire situation is shaping up for investors.

 

Reason for investment:

 

 When it comes to various debt mutual funds, the time period available for investment plays an important role. For money that has to be deployed for a very short period of time, which could just be a few weeks to a few months, then the choice has to be between liquid funds and ultra short-term funds. If the time period is very short then the preference should tilt towards liquid funds and vice versa. Once the nature of the fund is selected then investors have to look closely at the liquid funds and then see the kind of portfolio that they have. The idea behind a liquid fund is that they look at very short-term instruments so that investors can match their time horizon with the investment that they are choosing.

Looking at performance:

There are various ways in which investors look at the performance of funds and how they have fared in the past before they actually complete their investment.

The usual way to consider past performances is to see the position over a longer time frame because this will give a better picture that will take a longer period into consideration when varying market conditions would be present on the ground. However, the situation has to change when it comes to liquid funds because a longer time frame here might not give the right picture. Since this is a very short-term investment route, it is the actual performances over short time periods that become important for the investor.

 

Short spikes:

One of the main features of liquid funds is that the returns that are earned here need not be proportional. This is due to the fact that the short-term money market does not behave in a linear manner over a period of time and hence, there is a need for the individual to look at this specific condition. In case of adequate liquidity in these markets, then the rates could crash, leading to a short time when the overall returns for these funds are very low.

On the other hand, the spike in the rates to very high levels for short time periods can also mean a sharp rise in the earnings, which is a good thing for investors who want to invest during this time period.

Overall performance of these funds is difficult to predict because there can be sudden changes that are witnessed in the shortterm market. What individuals have to ensure is that they have the right reason for investing in these funds. There should not be any great expectation in terms of extremely high returns because the money here is just being kept for a short period of time. The other thing is that there has to be a clear understanding of the risk that is present in such investments which is that returns can drop significantly for a very short period of time.

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