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Podcast Transcript:

Roshan: Hi, this is Roshan and I am joined with Samyuktha. We are part of ithought’s Fixed Income Strategy team. Today we will be talking about what we could do about short term debt funds. We all talk about debt funds as a replacement to fixed deposits, but is there something that acts as a savings bank replacement? 

Samyuktha: Hi Roshan. Yes, there are quite a few options that qualify and we broadly label them as short-term debt funds. 

Roshan: Aren’t short-term debt funds FD alternatives for 1-3 year horizon? 

Samyuktha: You’re right. “Short-term” can be interpreted both ways. Per the SEBI classification, a short duration fund has a duration between 1 to 3 years. However, in general, “short-term” refers to a period of one year. So, in this case, it would mean debt instruments that mature within a year. 


Roshan: When you think about it, one year is quite a long-time. So, is it just one fund or are there options? 


Samyuktha: Interesting point that you bring up here. You’re right – one year is a long time and there are various options that mature within a year. You have: 

  1. Overnight Funds – where the instruments mature in a day 
  2. Liquid Funds – where the duration is less than three months 
  3. Ultrashort Term Funds – where the instruments have a duration ranging between 3 to 6 months 
  4. Low Duration Funds where the instruments have a duration ranging between 6 to 12 months 
  5. Money Market Funds – that invest in securities that mature within a year. Of the lot, money market funds are the most flexible – in the sense one fund house could have a money market fund that looks like a low duration fund, while another could have one that looks like a liquid fund. 


Roshan: There’s a lot of focus on investing for the long-term, so does it make sense for serious investors to explore short-term avenues? 


Samyuktha: Of course, I think we started this conversation talking about whether there was a category that acts as a proxy to the savings bank account. All of us have money parked in our bank accounts – it might make sense to put that into an overnight or liquid fund. One could also shift their emergency fund money into one of these categories. 

Over an above this, if you have expenses that you incur on a frequent basis, you could leverage the right funds. Let me elaborate with examples – some of us have insurance premiums that we pay every year or subscriptions. Or we like to vacation once or twice a year – so saving to spend would be a smart way to go about this. 

For serious long-term investors, there’s an opportunity. At some point, a goal that was far away, becomes imminent. So, the investor’s focus is going to shift from growing their wealth to preserving it. And when that happens, you could look at short-term debt funds to generate predictable returns that protect the value of the investments. 


Roshan: So I can see how this is useful for individuals like me. Could corporates or startups also benefit from these investment options? 


Samyuktha: Absolutely, many companies choose to use a current account for their working capital needs because of the ease of liquidity. But, if they were to segment their working capital needs with appropriate buffers. They could move money they don’t need immediately to liquid, ultrashort, or low duration debt funds. 

Even charitable trusts could consider switching to high-quality debt funds as the returns are slightly better than those of fixed deposits and there’s no penalty for premature withdrawal. 


Roshan: But is it really as liquid as a current account or a savings bank account? 


Samyuktha: Well, nothing is going to be exactly equivalent. But debt funds come quite close. You’ll receive your money in one working day as opposed to instantaneously. You also get a slightly better return and that’s the tradeoff. For personal finance goals, the exit is known in advance and can be planned for. For companies, working capital management is crucial. The idea is not to put all your money to earn the best returns but to optimize that capital and ensure that it’s working for you. 


Roshan: Thanks, this has been quite informative! Our specialisations include helping you prepare for short term goals and developing treasury management strategies for corporates. If you have any queries, feel free to drop us a message or reach out to our advisors.

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