Unlisted shares safe but tread cautiously

Are liquid funds and debt funds the same? Which fund is ideal for short-term investment?

NS VasuSrinivas, Parvathipuram

There are various types of debt funds, and they are categorised based on specific goals, risk, yield and investment duration. So, within Debt funds, different options are available to investors. One must tailor the investment needs to address any unexpected financial emergency or unforeseen incidents that may arise. One can park a portion of money in liquid funds for short-term and long-term goals.

Liquid funds invest in debt securities or money market instruments with a maturity of up to 91 days, like treasury bills and commercial papers. Typically, they invest in high-grade debt securities with short maturity periods. Liquid funds do not offer any guaranteed returns. Hence, they carry low risk and deliver low yields but higher than fixed deposits. Holding a liquid fund for less than seven days attracts an exit load. If you hold liquid funds for three years or less, the returns on liquid funds will be taxed as per the investor's income tax slab rates.

Ultra Short Duration Funds are another category of debt funds that invest in debt instruments with a duration of 91 days to six months. They tend to provide higher returns than liquid funds and FDs as well. Ultra Short Duration Fund carries a marginally higher risk than liquid funds and also attracts an exit load on most schemes. The taxation on returns is the same as on liquid funds. However, the liquidity for Ultra Short Duration Funds is lower as compared to liquid funds. This type of debt fund suits you if you have an investment horizon of up to six months.

Overnight funds are another class of debt funds with a maturity of just 24 hours. Overnight funds are instruments that invest in debt securities maturing the next day, like overnight reverse repo and collateralised bonding and lending obligation. Overnight funds are ideal for investors who want to park their funds for a day. These are usually considered the safest instruments. In terms of liquidity, Overnight funds are akin to savings bank accounts. This type of fund does not carry any capital and interest rate risk. There is no exit load. Income tax on returns will be calculated as per the IT slab rates of assessees.

Overnight funds come to your rescue when you have sold a property or an asset and want to park the proceeds for a day before putting it fixed in a bank or investing in equities.

Money Market Funds invest in money market instruments with a maturity of up to one year. Long Duration Funds are a type of Debt Fund scheme that invests in debt securities with a duration of more than seven years. Long Duration Funds come with higher risk than the above-described funds, as the duration is longer than other categories of debt funds. However, debt funds are less riskier than equity mutual funds.

You may consider any of the above debt funds based on your investment goal, required return, liquidity, risk-bearing capacity and time horizon.

Is it safe and worthwhile to invest in an unlisted company's securities?

VS Reddy, Buggapadu, Khammam

Yes, you can invest in unlisted shares. However, unlisted shares are riskier than listed shares. But, there is the risk-return tradeoff - the higher the risk, the higher may be the potential reward. Unlisted shares are less liquid and less regulated. Less liquid or illiquid because there will be a few opportunities to buy and sell these shares as unlisted shares are not publicly traded. You can buy directly from promoters or invest in unlisted securities through Portfolio Management Services (PMS) funds. However, some unlisted shares are hidden gems with substantial growth opportunities and the potential to make money. Seek help from an authorised financial advisor or CA who has a knack for assessing the fair value of the unlisted shares. There are chances that you get defrauded while dealing with strangers online. Be cautious and deal with recognised and reputed brokers to avoid being cheated by online fraudsters. Go through the process of due diligence. The transaction and transfer of shares can be monitored using the CDSL app and NSDL app.