2. Short-Term Bond Funds

“Short-term bond funds and fixed maturity plans can be attractive options given that current 1-2 year yields on bonds are roughly 10%. If an investor wants to invest for the short term, then a liquid or an ultra-short bond fund will make for a good choice,” says Srikant Subramanian, Research Analyst, from Morningstar India.

Depending on your affinity for risk, Short Term debt mutual funds may seem more profitable and tax saving as well. However, if interest rates do reduce, these bond funds will be quick to follow.

This would bring the question back to Reinvestment Risk as the option for locking up funds for a long term at a rate like it is currently will be lost. Some experts feel short term bonds are a good idea regardless of the interest rate movement.

“If the economy goes through the high interest rate scenario, it makes sense to invest in liquid funds and short-term funds. However, as the interest rate settles down, liquid funds would be quick to fall in line with market's interest rates, and accordingly, returns will fall too. Short-term funds are a good proposition for an investment horizon of 1-2 years in all interest rate cycles, irrespective of the interest rate movement”, adds Amar Ranu, Senior Manager, Motilal Oswal Securities, as quoted by ET.