Best short term funds to buy

Funds in this category are suitable for investors with an investment horizon of more than a year and prefer low interest rate risk. We classify these funds as those which have an average maturity in the range of 1 to 4.5 years over the past twelve months, which helps them guard against interest rate risk.

Interest rate movements impact the returns from these funds as bond prices and yield are inversely related. So, newer bonds with a higher yield become more attractive when the interest rate rise, and the market price of older bonds falls, thus lowering the NAV of funds holding the same.

The returns from funds in this category are fairly predictable, with the investment risk limited to the default from the issuer of the instrument. Moreover, investments by these funds in bonds with a high maturity will see its price change more dramatically than a shorter maturity paper as they are more interest rate sensitive.

Keep in mind all these facts before investing in such funds because investments in papers with rating below AA have the potential to earn a higher return, but at the same time also pose the risk of default.

Following are India's finest short term funds that you can invest in:

Morgan Stanley Short Term Bond
Peerless Short Term
Sundaram Select Debt Short-term
UTI Short-term Income