Short Term Mutual Funds

1. Low to Moderate Risk: These funds are generally invested in stable companies or fixed securities like government bonds, treasury bills, corporate bonds, etc. The risk level in such bonds is low to moderate, making it ideal for investors having a low-risk appetite.

1. Better Returns: These mutual funds offer returns better than fixed deposits and fall under the low-risk category.

1. Easy Liquidity: These funds are usually open-ended, which means you can redeem your investment at any time. You may be charged an exit load depending on your mutual fund.

Benefits of investing in short -term mutual funds:

The listed below are some of the benefits of investing in short-term mutual funds: 

1. Tax Benefits: The short-term mutual funds are taxed as per your income tax slab for short-term capital gains. If you hold the mutual fund for a period of more than three years, you have indexation benefits on long-term capital gains.

1. Less volatile: In comparison to long-term mutual funds, short-term mutual funds fluctuate less with changes in the market. This makes it an ideal choice for investors looking for stability.

1. Predictable Returns: These mutual funds are debt funds that generally invest in fixed securities like government bonds, corporate bonds, or quality companies. The return in such cases is generally assured and predictable.

1. High Liquidity: These funds are open-ended and can be liquidated easily. This helps you get quick access to cash in times of need.

1. Better Returns than Fixed Deposits: In a low-interest-rate environment, short-term debt funds generally offer better returns than traditional bank fixed deposits.

1. Ideal for investing extra cash: The short-term mutual funds are a perfect choice for investors who want to invest extra cash for a few months to a few years without committing to long-term lock-in periods.

Benefits vs Risk of Investing in Short-Term Mutual Funds

The benefits vs. risks of investing in short-term mutual funds are as follows:

Factors to consider when investing in short-term mutual funds

The listed below are some of the benefits of investing in short-term mutual funds:

Risk Tolerance: While short-term funds are generally less volatile than long-term funds, they still carry some risks, such as interest rate risk and credit risk. Assess your risk tolerance before investing.

Fund Objectives and Strategy: Understand the fund's investment Strategy, such as whether it focuses on government securities, corporate bonds, or money market instruments. Ensure it aligns with your financial goals.

Expense Ratio: The expense ratio represents the annual fees charged by the fund. Lower expense ratios can lead to higher net returns, especially for short-term investments.

Liquidity: Short-term mutual funds are generally liquid, but check the fund's redemption policies, such as exit loads or lock-in periods, to ensure you can access your money when needed.

Tax Implications: Understand the tax treatment of short-term mutual fund gains. In many jurisdictions, short-term capital gains are taxed at a higher rate than long-term gains.

Diversification: Ensure the fund is well-diversified across different sectors and issuers to reduce the impact of any single security's poor performance.

How do Short-Term Mutual Funds Work?

To understand how short-term mutual funds work, it is important to understand the investment period of short-term mutual funds and its impact on the investment strategy:

1. Duration of the fund: A fund with a higher duration is more volatile to the market and has greater risk when interest rates fluctuate. The actual duration of the mutual fund is calculated using a complex formula. However, a simple rule for investors is that the longer the maturity of the bonds in a fund portfolio, the higher the duration. That is why long-term mutual funds are more sensitive to market changes than those focused on short-term securities.

1. Short-duration definition: According to the SEBI guidelines, short-duration funds must maintain a portfolio duration between 1 to 3 years. This allows them to invest in a mix of short- and slightly longer-term debt instruments.

1. Short-term Mutual Fund Investment: These mutual funds are generally invested in government securities, corporate bonds, derivatives, and bonds issued by other stable financial institutions and public sector companies. In order to maintain easy liquidity, these mutual funds also invest in treasury bills, commercial papers, and certificates of deposit.

1. Returns on short-term mutual funds: The short-term mutual funds are debt funds that offer regular interest from the underlying debt instruments. When interest rates fall, the market value of the bonds rises, resulting in capital gains. When interest rates rise, bond values fall, resulting in capital losses.

Who should invest in short-term mutual funds?

Short-term mutual funds are more suitable for the below-listed group of people:

1. Risk-averse investors: Short-term mutual funds typically invest in low-risk instruments like government securities, high-quality corporate bonds, and money market instruments, which are less volatile than stocks.

1. First-time investors: Short-term mutual funds are less complex and less risky than equity funds, making them a good starting point for those unfamiliar with the market.

1. Investors having short-term financial goals: Short-term mutual funds are designed to provide relatively stable returns over a short period, making them ideal for goals that are near-term.

1. Investors looking for diversification: Short-term mutual funds can act as a stabilizing component in a diversified portfolio, reducing overall risk.

Difference between short-term and long-term mutual funds

The below listed is the difference between short-term and long-term mutual funds:

Returns on Short Term Mutual Funds

Compared to bank deposits like savings account and fixed deposits, short-term funds offer higher returns for investments held for a short duration. The percentage of returns range from 8%-9%, depending on the assets available in your short-term mutual fund portfolio. With attractive tax benefits, the overall return on investment is higher than the post-tax returns earned from other investment schemes.

Taxation

There are two ways to earn returns from short-term mutual funds, either through dividends or capital gains.

1. Tax on Dividend: The financial year 2020–21 onwards, dividends are taxed in the hands of investors based on their individual income tax slab.

1. Tax on Capital Gains: You earn capital gains when you sell or redeem your mutual funds at a higher price than you purchased them for. The taxation of these gains depends on how long you hold the investment before selling it:

1. Short-Term Capital Gains (STCG): If you hold the mutual fund for up to 3 years, the gains are considered short-term and will be taxed as per your applicable income tax slab rate.

1. Long-Term Capital Gains (LTCG): If you hold the fund for more than 3 years, the gains are treated as long-term. In such a case,, you get indexation benefits, which means the purchase cost is adjusted for inflation using a government-specified index. This reduces your taxable gain. LTCG on debt funds is taxed at 20% after applying indexation.

Top Short-Term Funds Available in India

Some of the short-term mutual funds that perform well in the market are listed below:

Debt - Ultra Short Term Plans

1. Baroda Pioneer Credit Opportunities Fund - Plan A - Growth
2. ICICI Prudential Banking & PSU Debt Fund - Regular Plan - Growth
3. ICICI Prudential Ultra Short Term Plan - Retail Plan - Growth
4. Reliance Medium Term Fund - Growth
5. Kotak Banking and PSU Debt Fund - Growth
6. Birla Sun Life Cash Manager - Growth
7. Union KBC Ultra Short Term Debt Fund - Growth
8. Kotak Treasury Advantage Fund - Growth
9. JM Money Manager Fund - Super Plus Plan - Growth
10. ICICI Prudential Savings Fund - Plan B - Growth
11. BOI AXA Treasury Advantage Fund - Regular Plan - Growth
12. JM Money Manager Fund - Regular Plan - Growth
13. Franklin India Low Duration Fund - Monthly Dividend
14. Canara Robeco Savings Plus Fund - Regular Plan - Growth
15. Indiabulls Ultra Short Term Fund - Growth
16. ICICI Prudential Flexible Income Plan - Growth
17. Reliance Money Manager Fund - Retail Plan - Growth
18. SBI Treasury Advantage Fund - Regular Plan - Growth
19. Peerless Ultra Short Term Fund - Regular Plan - Growth
20. HSBC Ultra Short Term Bond Fund - Regular Plan - Growth

Floating Rate Debt Funds - Short Term

1. Reliance Floating Rate Fund - Short Term Plan - Growth
2. L&T Floating Rate Fund - Regular Plan - Cumulative
3. HDFC Floating Rate Income Fund - Short Term Plan - Retail Plan - Growth
4. UTI Floating Rate Fund - Short Term Plan - Growth
5. Escorts Short Term Debt - Growth
6. DHFL Pramerica Short Term Floating rate Fund - Growth
7. Birla Sun Life Floating Rate Fund - Short Term Plan - Retail - Growth
8. Sundaram Flexible Fund - Short Term - Growth

Gilt Mutual Funds (Debt) - Short Term

1. HDFC Gilt Fund - Short Term - Growth
2. ICICI Prudential Gilt Fund - Treasury Plan - PF Option - Regular Plan - Growth
3. SBI Magnum Gilt Fund - Short Term - Growth
4. Tata Gilt Securities Fund - Short Maturity Fund - Growth
5. ICICI Prudential Short Term Gilt Fund - Regular Plan - Growth
6. Tata Gilt Securities Fund - Short Maturity Fund - Growth
7. UTI G-Sec Short Term Plan - Growth
8. IDFC Government Securities Fund - Short Term Plan - Regular Plan - Growth
9. DSP Black Rock Treasury Bill Fund - Regular Plan - Growth

Income Mutual Funds (Debt) - Short Term

1. HDFC High Interest Fund - Short Term Plan - Growth
2. Birla Sun Life Short Term Opportunities Fund - Growth
3. ICICI Prudential Short Term Plan - Regular Plan - Growth
4. Baroda Pioneer Short Term Bond Fund - Growth
5. DHFL Pramerica Short Maturity Fund - Growth
6. Reliance Short Term Fund - Growth
7. BNP Paribas Short Term Income Fund - Regular Plan - Growth
8. L&T Short Term Income Fund - Regular Plan - Growth
9. Franklin India Short Term Income Plan - Growth
10. DSP Black Rock Banking & PSU Debt Fund - Growth
11. Birla Sun Life Dynamic Bond Fund - Retail Plan - Growth
12. Birla Sun Life Treasury Optimizer Plan - Retail - Growth
13. JM Short Term Fund - Regular Plan - Growth
14. UTI Banking & PSU Debt Fund - Regular Plan - Growth
15. UTI Short Term Income Fund - Regular - Growth
16. Birla Sun Life Short Term Fund - Growth
17. IDFC Corporate Bond Fund - Regular Plan - Growth
18. Invesco India Short Term Fund - Growth
19. UTI Income Opportunities Fund - Growth
20. DSP Black Rock Short Term Fund - Regular Plan - Growth

Disclaimer

Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.

GST rate of 18% applicable for all financial services effective July 1, 2017.