Financial expert Sanjay Kathuria from Mint has identified four specific debt fund categories as suitable for investors with a 1-3 year investment horizon. According to Kathuria's analysis, these categories offer the most appropriate risk-return profile for short-term debt investments. The recommendations come from a recent episode of the Sanjay Kathuria Podcast featuring Kirttan Shah, Founder & CEO of Truvanta Wealth.
Short duration funds are designed to invest in debt and money market instruments with a Macaulay duration between one and three years according to SEBI's categorisation norms. As reported by Mint, these funds are specifically designed for investors with similar investment horizons and limit interest rate risk compared to long duration funds. Dynamic bond funds operate differently, as they do not have a fixed maturity profile and fund managers actively adjust the portfolio's duration based on interest rate outlook.
Corporate bond funds must invest at least 80% of their total assets in highest-rated corporate bonds (AA+ and above) according to SEBI norms. As highlighted by Kathuria, these funds are particularly interesting because 80% of the money legally must sit in triple-A rated bonds, representing the safest category available. Banking & PSU funds invest at least 80% of their assets in debt instruments issued by banks, Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs) and municipal bonds. Since the underlying issuers are generally considered financially stronger, these funds typically carry relatively lower credit risk.
According to the analysis, credit risk funds are the only category where fund managers are allowed to take real credit risk on purpose. As per SEBI categorisation norms, these funds are required to invest at least 65% of their assets in corporate bonds rated AA and below. Unlike most other debt fund categories that primarily invest in higher-rated securities, these funds can take exposure to lower-rated bonds in an attempt to earn higher yields. The expert emphasizes that credit risk funds represent the only category where managers actively seek credit risk exposure.
