Harness the power of debt funds to meet your key financial targets

Debt funds help achieve short- to medium-term goals if your risk profile aligns with your investment horizon

- Jash Kriplani

Most investors associate mutual funds with equities, but debt funds can also play a key role if used correctly.

They are particularly useful for shortto medium-term goals, offering better yields and tax efficiency than bank savings or deposits. With 16 debt fund categories available, the key is to choose one that aligns with your investment objectives.

For goals ranging from a few months to a few years, advisors often suggest shifting funds from equity to debt to protect the corpus from stock market volatility. Here’s a look at popular debt fund categories and how they can be used.

For instant liquidity

If you need to park money for a few days or weeks, consider overnight and liquid funds — the shortest-duration debt categories, ideal for cash management and money you might otherwise leave idle in a savings account. Overnight funds invest in securities that mature the next day, carry virtually no interest rate risk, and are among the safest mutual fund options. They provide the simplest, lowest-risk parking spot for short-term funds. Liquid funds extend the investment horizon slightly, allowing investment in instruments that mature in up to 91 days.

“With bank savings rates languishing around 2.5%, liquid funds can offer anywhere between 5.5% to 6.5% returns,” said Vikram Dalal, managing director at Synergee Capital.

“Liquid funds are a good option to park emergency funds as these offer better returns than bank fixed deposits and can be accessed at a short notice,” said Vishal Dhawan, founder of Plan Ahead Wealth Advisors.

These funds suit investors, requiring emergency money to earn returns without being locked up, accessible on a day’s notice. If you redeem before 3:00 pm, the amount is credited the next business day. You can also redeem up to 250,000 per investor per day instantly, with funds hitting your account the same day.

For short-term goals