An investor into debt funds has basically two requirements - liquidity management and asset allocation. For liquidity management, any duration fund ranging from overnight to ultra short term category can be selected. Asset allocation begins at short term fund level. Short term funds invest in paper with a maturity of 1-3 years.
Short duration is a Rs 92,000 crore category (as of April 30, 2020) which is spread across 27 funds but, over 50 percent of the total assets under management are controlled by the top 5 schemes in this category.
Harshvardhan Roongta of Roongta Securities says investors must match their investment horizon with type of scheme and invest in funds which predominantly invest in AAA rated instruments. Research shows that Yield To Maturity of the scheme barely improves even if AAA component is reduced, so why would a fund manager take that risk?