Why Conservative Investors Should Focus On Short Duration Funds

As written on 5^th Feb 2021

It is not wrong to dream big and become financially wealthy. But, if you do not have the appetite for risk to invest in schemes that carry a high risk/reward ratio, you might have to look at more conservative investment options. Most individuals feel that mutual funds only invest in stocks and refrain from investing due to the risk involved. However, the fact remains that all mutual funds are not just equity mutual funds; they are further categorized based on their risk profile, asset class, securities in which they invest within the asset class, and also on their investment objective. Market regulator SEBI (Securities and Exchange Board of India) has further classified mutual funds for investors to be able to make an informed investment decision.

If you are someone who is not happy with their existing investments and the way they are performing and are looking for an alternative investment vehicle, you can consider diversifying your investment portfolio with debt Mutual Funds like short duration schemes.

A short duration fund is an open ended debt fund scheme which invests in debt and money market instruments. As per SEBI guidelines, a short duration fund must invest in debt and money market instruments such that the Macaulay duration of the portfolio is between 1 year to 3 years. Short duration funds are ideal for anyone who wishes to earn decent capital appreciation without exposing their finances to the equity market’s volatile nature.

Why should investors focus on short duration schemes?

Short duration schemes hold the potential to offer decent capital appreciation. If you are planning to switch from traditional avenues to mutual funds with relatively low risk compared to equity schemes, you can give yourself a head start by investing in a short duration scheme. Also, since short duration schemes do not have any lock in period, investors are free to withdraw or redeem their short duration scheme units on any business day. The amount is transferred to the investor’s linked savings account. You are free to liquidate units as per your income needs, while the remaining amount continues to remain invested. Short duration schemes offer the liquidity and flexibility that are not available with traditional avenues do not have such ease of investment and withdrawal options.

Short-term schemes have the option of SIP and lump sum investment. SIP app provides the Systematic Investment Plan, an investment method where you can invest small fixed amounts at regular intervals. If you have surplus money and is sitting ideal, you can even invest that by making a lump sum investment in a short duration scheme. However, with SIP, one does not need to have a large investment amount for investing in short duration schemes. You can now invest a small fixed amount at periodic intervals via SIP and continue investing till your investment objective is achieved. A Systematic Investment Plan is an easy a hassle-free way to invest in mutual funds. All an investor has to do is complete all the formalities and KYC documentation before investing. Investors can also use the SIP calculator, a free online tool to help determine how much corpus their SIP investments might accumulate at the end of the investment journey.

Those who start a SIP in short duration schemes tend to benefit from the power of compounding. In mutual funds, compounding refers to the interest that you earn on the interest earned from the initial investment amount. Investors who allow reinvesting tend to benefit from compounding. This is ideal for anyone who wishes to build a decent corpus through systematic and long term investing.

You can choose the growth option if they want to benefit from compounding. This is because if you opt for the dividend plan, you will receive dividends, which means your capital will not get reinvested. Hence, to benefit from compounding, make sure that you opt for the growth plan and not the dividend plan while investing in short duration schemes.

Axis Short Duration Fund

Axis Short Duration Fund is an open ended short duration debt scheme investing in instruments such that the Macaulay duration of the portfolio is from 1 year to 3 years. The investment objective of Axis Short Duration Fund is to generate stable returns with a low risk strategy while maintaining liquidity through a portfolio consisting of debt and money market instruments. However, there can be no assurance or guarantee that the investment objective of Axis Short Duration Fund will be achieved.

Benefits of investing in Axis Short Duration Fund

• Axis Short Duration Fund invests in shorter duration debt and money market instruments which give the potential to generate relatively stable returns with comparatively lesser risk
• Axis Short Duration Debt Fund invests in high quality papers which allows participation in the short duration part of the curve which is a large and highly traded space
• Those seeking investments in Axis Short Duration Fund should remain invested for a minimum duration of 1 year

Discuss your financial goals with your financial advisor before investing in mutual funds.

Axis Short Duration Fund
An open ended short duration debt scheme investing in instruments such that the Macaulay duration of the portfolio is from 1 year to 3 years

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.