Where to invest with a time horizon of 6 months?

When it comes to investing in mutual funds, it is always said that be invested for the long-term. However, at times there are some situations in which you may require money in the short span of time. So, is it true that mutual funds are only for the long-term and not for the short-term? That is not the case. Mutual fund is one of those products which has a variety of sub-products for different needs and across investment durations. Mutual funds are not restricted to durations. For every duration, there are funds available, be it short duration or long duration.

Even for short time horizons, there are different options of funds available. SEBI (Securities and Exchange Board of India) while re-categorization has categorized debt funds on the basis of its Macaulay duration. So, as per this guideline, ultra-short duration funds fits best for the investment horizon of 6 months. As per SEBI, ultra-short duration funds are those funds which invest in debt and money market instruments such that the Macaulay duration of the portfolio lies between 3 months to 6 months. If we look at the average 6 months returns provided by the ultra-short duration funds then they stand as 3.62 per cent and 1-year return of 6.36 per cent.

What is Macaulay duration?
Macaulay Duration is a concept developed by Frederick Macaulay in 1938. It measures the bond’s sensitivity to interest rate changes. Technically, it is the weighted average number of years the investor must hold a bond until the present value of the bond’s cash flows equals the amount paid for the bond.

So, if your investment time horizon is 6 months then it would be prudent to invest in funds with Macaulay duration of 6 months. In that respect, ultra-short duration funds would be a perfect bet. However, if you are moderate risk taker then you may also consider investing in low duration funds and if you are an aggressive risk taker then investment in short duration funds can be considered.