Looking to park your money for a few days? This category of mutual funds may suit you best

By: |
February 27, 2019 7:31 PM

If you have a large sum of money lying idle for a day or two, you can neither put it in a fixed deposit (FD) account nor in any long-term option like equity mutual fund (MF) to fetch some decent return.

mutual funds, MF, debt mutual funds, debt funds, Overnight Fund, Liquid Fund, Ultra Short Duration Fund, Low Duration Fund, Money Market Fund, Short Duration Fund, Medium Duration Fund, Medium to Long Duration Fund, Long Duration Fund, SEBI, NAVThe horizon of investments in debt MFs may vary from as low as 1 day to 3 years.

If you have a large sum of money lying idle for a day or two, you can neither put it in a fixed deposit (FD) account nor in any long-term option like equity mutual fund (MF) to fetch some decent return.

What you may explore is debt mutual funds, as such funds are considered safer for short-term investments because they remain unaffected by daily fluctuations in the equity markets. However, debt funds are also subject to some other risks, like interest rate risk, credit risk etc due to fluctuations in interest rates and trading of debt papers in secondary markets.

However, the risks associated with debt funds increase with the duration of the debt papers that comprise the debt fund portfolio.

So, the question is, in which category of debt fund, because the horizon of investments in debt MFs may vary from as low as 1 day to 3 years.

According to the duration of the debt instruments in which investments are made, debt funds are divided into several categories, like Overnight Fund, Liquid Fund, Ultra Short Duration Fund, Low Duration Fund, Money Market Fund, Short Duration Fund, Medium Duration Fund, Medium to Long Duration Fund, Long Duration Fund etc.

Although liquid funds provide ready liquidity and are one of the most popular funds for people who want to put their money for short duration, but following the negative impact on NAV of some liquid funds after the IL&FS fiasco, the question arises on the safety of liquid funds, which puts money in debt instruments with maturity period of as low as 91 days or less.

To counter the problem, the Securities and Exchange Board of India (SEBI) is encouraging the Overnight Funds, which invest in debt securities that park the money in bonds due for maturity in a day.

Although the rate of return on overnight securities may be lower than that of the instruments having 91-day duration, but it would provide better capital protection as overnight funds invest in reverse repos and also in a Collateralised Borrowing and Lending Obligation (CBLO), which is run by the Clearing Corporation of India (CCI). The corporation seeks short-term government bond as collateral from bond issuers to mitigate default risks, making the credit risk lowest among most of the debt mutual fund category.

Due to almost nil chance of any negative impact of interest rate fluctuations on overnight instruments, AMCs are now coming up with funds in the overnight category for the risk-averse investors, for whom capital safety is prime even if it comes with a bit lower return.

So, if you want absolute safety for investing a large amount of money only for a few days, overnight funds would be an ideal choice for you.

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