If you are an investor with a 1-year to 3-year investment horizon, investment advice and options are available aplenty. Depending on your risk-appetite and investment objective, you have a range of market-linked (for example mutual funds) and assured return (fixed deposits) instruments to choose from.
But where does an investor with a short investment horizon head? In this article we outline some of the short-term options available to investors and find out how they face-off.
For the purpose of our study, we shall assume that an investor wants to invest a sum of Rs 10,000 for a 181 day (approximately 6 months) period. Let's start off with short-term fixed deposits.
For investors who offer higher importance to capital preservation vis-à-vis returns, an assured return avenue like fixed deposits would be the apt choice.
| FD Rates (per annum) | |
| State Bank of India | 5.00% |
| HDFC Bank | 5.00% |
| ICICI Bank | 5.00% |
The table above lists rates offered by some of the leading banks. While company deposits offer higher returns, investing in the same entails taking on higher risks since they are unsecured in nature.
Hence only fixed deposits with a high level of safety have been considered for the purpose of this study. In the example above, the investor would at best earn a return of 5 per cent per annum or approximately 2.5 per cent for the 181-day period considered by us.
Click here for fixed deposit rates
Now let's consider the market-linked options. Short-term floating rate funds are suited for investors with an investment horizon of six months. Floating rate funds invest in instruments that revise their coupon rate in sync with changes in a pre-determined benchmark like the MIBOR (Mumbai Interbank Offered Rate).
As a result, any change in the benchmark is reflected in the floating rate instrument's coupon as well. In a situation like the present one when interest rates are on the rise, floating rate funds can prove to be particularly lucrative.
| Short-term Floating Rate Funds | NAV (Rs) | 1-Wk | 1-Mth | 6-Mth |
| UTI - FLOATING RATE STP | 10.90 | 0.11% | 0.47% | 2.73% |
| KOTAK FLOATER STP | 10.98 | 0.10% | 0.45% | 2.66% |
| JM FLOATER FUND STP | 11.01 | 0.10% | 0.44% | 2.65% |
| TEMPLETON FLOAT STP | 12.07 | 0.11% | 0.46% | 2.62% |
| HDFC FLOATING STP | 11.23 | 0.11% | 0.44% | 2.60% |
The top performers in the short-term floating rate funds segment have managed to deliver better returns vis-à-vis fixed deposits, but only marginally. Also there are some factors which should be considered to put this comparison in the right perspective.
The returns from short-term floating rate funds are market linked and subject to change unlike fixed deposit returns. Hence the better returns should be viewed in light of the additional risk borne.
Secondly, all short-term floaters are not necessarily "retail" investment avenues as regards the minimum investment amount. While investors could get invested with a Rs 500 initial investment (for example Grindlays Floating Rate - Short Term); the same could also be prohibitively high in other cases (Rs 100,000 for Templeton Floating Rate - Short Term).
Rank top performing floating rate funds
One area where short-term floating rate funds score over fixed deposits is liquidity. Since investors are not required to bear entry or exit loads, they can manage their investments with a high degree of freedom. Conversely, a fixed deposit investor would have suffered a loss of interest for prematurely liquidating his investments.
On the taxation front, both the investment avenues are tax neutral. This is consequent to removal of Section 80L in the latest budget.
What should investors do?
Always assess your risk appetite and invest accordingly. Even if you are investing for a shorter tenure; this basic tenet of investing should not be ignored.
Setting your priorities is vital. Decide if you accord higher importance to capital preservation, liquidity or clocking growth. It will guide you towards the appropriate investment avenue.
Finally determine the adequacy of your investment amount vis-à-vis the chosen investment avenue.
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