Where to invest for the medium term?

Under the current scenario, which debt fund among corporate funds, short-duration funds and PSU funds is better for an investment period of three to five years? - Manjunatha Sulur G

The debt mutual fund space is filled with different types of funds like floater funds, gilt funds, fixed maturity funds etc.

However, in theory, corporate bonds (that invest 80 per cent in the highest credit rating companies), banking and PSU funds (that invest 80 per cent in banks, public sector undertakings and public financial institutions), and short-duration funds (scheme duration of one to three years) are not poles apart.

All of these can fit into a retail investor's core debt portfolio under any scenario. Additionally, over long timeframes, their risk-return trajectory is also pretty similar.

While corporate bond funds predominantly stick to corporate bonds, BPSU funds invest in debt securities of banks, public sector undertakings (PSUs) and public financial institutions (PFIs). While some AMCs manage such funds with a higher maturity of around four to five years, some stick to the lower end and a few follow a roll-down maturity style.

But what should you prefer?
Though they all are close, investors should choose short-duration funds primarily for two reasons:

• Flexibility
  Short-duration funds are flexible enough to invest across different kinds of debt securities. They are also more diversified.

• Predictability
  Such funds come with a relatively predictable maturity structure (one to three years). Essentially, these funds are actively managed but within narrow, well-defined boundaries on duration (weighted average for the portfolio) and credit calls (credit risk change based on the manager's choice).

For financial goals beyond one year and for your core debt portfolio, short-duration funds should do the job.

Click here to get the list of funds hand-picked by our analysts.

Suggested read: Where to invest for the short term?

This article was originally published on October 27, 2022.