Short Term Mutual Funds
If the investor wishes to invest funds for a short duration (15 days or less), he/she can go for liquid funds and if they wish to invest funds in funds with a maturity period of 2 months to 4 months, they can opt for ultra short-term mutual funds.
What are Short Term Mutual Funds?
Short Term Mutual Funds are open-ended schemes that invest in assets that have a maturity of minimum 15 - 91 days or below, depending on the asset. This type of funds is ideal for investors who look for low-risk asset options.
Benefits of investing in short -term mutual funds:
The listed below are some of the benefits of investing in short-term mutual funds:
- Lower Risk Compared to Equity Funds: Short-term mutual funds primarily invest in debt instruments, reducing market volatility risks.
- Better Liquidity: These funds offer high liquidity, making it easy to withdraw funds quickly when needed.
- Higher Returns Than Fixed Deposits: Short-term debt funds often provide better returns compared to traditional bank FDs, especially in a low-interest-rate environment.
- Ideal for Parking Surplus Cash: Suitable for individuals looking to invest idle money for a few months to a few years without locking it in for the long term.
- Tax Efficiency: Short-term capital gains (STCG) are taxed as per your income slab, while long-term capital gains (LTCG) on holdings beyond three years get indexation benefits, making them more tax-efficient than FDs.
- Lower Interest Rate Risk: Unlike long-term debt funds, short-term mutual funds are less sensitive to interest rate fluctuations, making them a stable investment choice.
- Suitable for Conservative Investors: These funds are ideal for low to moderate risk investors looking for steady and predictable returns.
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.
Who should invest in short-term mutual funds?
Short-term mutual funds are more suitable for the below-listed group of people:
- 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.
- 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.
- 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.
- 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:
Parameter | Long-Term Mutual Funds | Short-Term Mutual Funds |
Investment Horizon | Designed for long-term goals (five years or more). | Designed for short-term goals (a few months to 3 years). |
Risk Level | Higher risk due to exposure to equities or long-duration bonds. | Lower risk as they invest in short-duration, high-quality debt instruments. |
Volatility | More volatile due to market fluctuations. | Less volatile, with more stable returns. |
Returns | Potentially higher returns over the long term. | Moderate but relatively stable returns. |
Liquidity | Less liquid due to potential exit loads or lock-in periods. | Highly liquid, with minimal or no lock-in periods. |
Interest Rate Risk | Higher sensitivity to interest rate changes (especially bond funds). | Lower sensitivity to interest rate changes. |
Expense Ratio | May have higher expense ratios due to active management. | Generally lower expense ratios compared to long-term funds. |
Tax Implications | Long-term capital gains may be taxed at a lower rate (depending on jurisdiction). | Short-term capital gains are often taxed at a higher rate. |
Suitability | Ideal for long-term goals like retirement, wealth creation, or children's education. | Suitable for short-term goals like emergency funds, vacations, or down payments. |
Examples | Equity funds, index funds, long-duration bond funds. | Liquid funds, ultra-short-term funds, money market funds. |
Market Sensitivity | Highly sensitive to market and economic conditions. | Less sensitive to market fluctuations. |
Diversification | Often diversified across sectors, geographies, and asset classes. | Focused on short-term debt instruments with limited diversification. |
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
Short-term mutual funds are available in the following options - dividend option or the growth option. If the investor opts for the growth option, the tax treatment will be similar to that of bank fixed deposits. The income earned from the funds will be considered part of the investor's overall income earned and taxed accordingly. However, if the investor goes for a dividend option the income earned from the investment is exempted from tax.
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
- Baroda Pioneer Credit Opportunities Fund - Plan A - Growth
- ICICI Prudential Banking & PSU Debt Fund - Regular Plan - Growth
- ICICI Prudential Ultra Short Term Plan - Retail Plan - Growth
- Reliance Medium Term Fund - Growth
- Kotak Banking and PSU Debt Fund - Growth
- Birla Sun Life Cash Manager - Growth
- Union KBC Ultra Short Term Debt Fund - Growth
- Kotak Treasury Advantage Fund - Growth
- JM Money Manager Fund - Super Plus Plan - Growth
- ICICI Prudential Savings Fund - Plan B - Growth
- BOI AXA Treasury Advantage Fund - Regular Plan - Growth
- JM Money Manager Fund - Regular Plan - Growth
- Franklin India Low Duration Fund - Monthly Dividend
- Canara Robeco Savings Plus Fund - Regular Plan - Growth
- Indiabulls Ultra Short Term Fund - Growth
- ICICI Prudential Flexible Income Plan - Growth
- Reliance Money Manager Fund - Retail Plan - Growth
- SBI Treasury Advantage Fund - Regular Plan - Growth
- Peerless Ultra Short Term Fund - Regular Plan - Growth
- HSBC Ultra Short Term Bond Fund - Regular Plan - Growth
Floating Rate Debt Funds - Short Term
- Reliance Floating Rate Fund - Short Term Plan - Growth
- L&T Floating Rate Fund - Regular Plan - Cumulative
- HDFC Floating Rate Income Fund - Short Term Plan - Retail Plan - Growth
- UTI Floating Rate Fund - Short Term Plan - Growth
- Escorts Short Term Debt - Growth
- DHFL Pramerica Short Term Floating rate Fund - Growth
- Birla Sun Life Floating Rate Fund - Short Term Plan - Retail - Growth
- Sundaram Flexible Fund - Short Term - Growth
Gilt Mutual Funds (Debt) - Short Term
- HDFC Gilt Fund - Short Term - Growth
- ICICI Prudential Gilt Fund - Treasury Plan - PF Option - Regular Plan - Growth
- SBI Magnum Gilt Fund - Short Term - Growth
- Tata Gilt Securities Fund - Short Maturity Fund - Growth
- ICICI Prudential Short Term Gilt Fund - Regular Plan - Growth
- Tata Gilt Securities Fund - Short Maturity Fund - Growth
- UTI G-Sec Short Term Plan - Growth
- IDFC Government Securities Fund - Short Term Plan - Regular Plan - Growth
- DSP Black Rock Treasury Bill Fund - Regular Plan - Growth
Income Mutual Funds (Debt) - Short Term
- HDFC High Interest Fund - Short Term Plan - Growth
- Birla Sun Life Short Term Opportunities Fund - Growth
- ICICI Prudential Short Term Plan - Regular Plan - Growth
- Baroda Pioneer Short Term Bond Fund - Growth
- DHFL Pramerica Short Maturity Fund - Growth
- Reliance Short Term Fund - Growth
- BNP Paribas Short Term Income Fund - Regular Plan - Growth
- L&T Short Term Income Fund - Regular Plan - Growth
- Franklin India Short Term Income Plan - Growth
- DSP Black Rock Banking & PSU Debt Fund - Growth
- Birla Sun Life Dynamic Bond Fund - Retail Plan - Growth
- Birla Sun Life Treasury Optimizer Plan - Retail - Growth
- JM Short Term Fund - Regular Plan - Growth
- UTI Banking & PSU Debt Fund - Regular Plan - Growth
- UTI Short Term Income Fund - Regular - Growth
- Birla Sun Life Short Term Fund - Growth
- IDFC Corporate Bond Fund - Regular Plan - Growth
- Invesco India Short Term Fund - Growth
- UTI Income Opportunities Fund - Growth
- 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.
FAQs on Short Term Mutual Funds
- What are short-term mutual funds?
Short-term mutual funds are debt-oriented funds that invest in fixed-income securities with short maturities (typically less than 3 years). They aim to provide stable returns with lower risk compared to long-term funds.
- Who should invest in short-term mutual funds?
These funds are ideal for conservative investors, those with short-term financial goals, ranging between a few months to up to three years, or anyone seeking liquidity and stability in their investments.
- What are the risks of short-term mutual funds?
While less risky than equity funds, short-term mutual funds carry interest rate risk and credit risk. However, these risks are lower compared to long-term debt funds.
- How do I choose the right short-term mutual fund?
Consider factors like expense ratio, credit quality of holdings, historical performance, fund manager expertise, and your financial goals.
- Are short-term mutual funds better than fixed deposits?
Short-term mutual funds may offer higher returns than FDs, but they carry slightly higher risk. Fixed deposits provide guaranteed returns and are more suitable for risk-averse investors.
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