Short Term Mutual Funds

Short Term Mutual Funds

Short term mutual fund is a type of fund that primarily invests in debt instruments with relatively short maturities. These funds are designed to provide investors with an investment option that falls between the low-risk nature of money market funds and the higher-risk profile of long-term bond funds. The main objective of short-term mutual funds is to generate stable income and preserve capital over a short investment horizon, typically ranging from a few months to a few years. 


What Is Short Term Funds?

Short-term funds are a type of debt funds that provide loans to companies for a duration of 1 to 3 years. These funds primarily invest in reputable companies with a demonstrated track record of timely loan repayment and possess adequate cash flows from their business activities to support their borrowing requirements.

Short-term funds invest in a diversified portfolio of debt instruments, such as government securities, money market instruments, and corporate bonds. The fund manager carefully selects these instruments based on their creditworthiness, liquidity, and potential for generating income. These companies are typically financially sound, with stable cash flows and strong business operations. By investing in such companies, short-term funds aim to mitigate credit risk and protect the investments of their unit holders.

Short-term Funds Examples

An example of a short-term mutual fund is the IDBI ST Bond Fund. This fund focuses on investing in a diversified portfolio of debt and money market instruments with short-term maturities. It aims to generate income for investors by investing in high-quality debt securities.

However, you should keep in mind that the performance of the IDBI ST Bond Fund may change over time, and it is vital to conduct thorough research and analysis before making any investment decisions. 

Short Term Mutual Funds Duration

Short-term mutual funds have maturity tenures ranging from as short as 91 days to as long as 3 years. There are different types of short-term mutual funds based on their duration. For instance, liquid funds are suitable for investments of less than 91 days, while ultra-short-term bond funds have a 3-6 months tenure. Low-duration funds are suitable for 6-12 months, and short-duration funds are ideal for an investment horizon of 1-3 years.

Short Term Mutual Funds – Benefits

The main benefit of short-term mutual funds is that they are well-suited for investors with a shorter investment timeframe, typically less than three months. They are a preferable alternative to traditional savings bank accounts for parking surplus funds. 

Other benefits of short-term mutual funds are given below: 

  • Short-term mutual funds have the potential to provide higher returns compared to traditional savings accounts and fixed deposits. These funds invest in a diversified portfolio of debt and money market securities, which can generate competitive returns in the short term.
  • Short-term mutual funds typically invest in low-risk securities with shorter maturities. This helps to mitigate risk as the underlying assets have shorter durations, reducing exposure to interest rate fluctuations and credit risks. As a result, these funds generally offer more stability and lower volatility compared to longer-term investments.
  • Short-term mutual funds offer high liquidity, allowing investors to buy or sell their fund units at any time easily. This means investors can access their invested funds quickly without incurring significant costs or penalties. This liquidity feature makes short-term mutual funds a flexible investment option, especially for individuals who may require their funds on short notice.
  • Short-term mutual funds can be more tax-efficient than fixed deposits and traditional savings accounts, especially when held for three or more years. Long-term capital gains from these funds are taxed lower, providing potential tax advantages for investors.

Short Term Mutual Funds – Limitations

The main limitation of short-term mutual funds is that they are subject to credit risks, which refers to the possibility of issuers defaulting on their payment obligations. Credit rating agencies like CRISIL assign ratings to short-term debt funds, indicating their credit quality and level of risk exposure. Investing in these funds means being exposed to credit risks, as there is a chance that the underlying companies may fail to make timely payments or default on their obligations. 

Other limitations of short-term mutual funds are given below: 

  • Liquidity Risk: This risk pertains to the possibility that the fund manager may face difficulties selling the underlying assets without incurring significant losses. If the market for these assets becomes illiquid or there is a sudden surge in redemption requests, selling the assets at fair prices can be challenging.
  • Credit Risk: Credit risk refers to the possibility that the issuers of the underlying assets may default on their obligations to pay interest and principal upon maturity. This risk arises if the issuers have a lower credit rating or face financial difficulties.
  • Interest Rate Risk: Short-term mutual funds are sensitive to changes in interest rates. Fluctuations in interest rates, influenced by various economic and geopolitical factors, can impact the value of the fund’s underlying securities. When interest rates rise, the value of existing fixed-income securities tends to decline, leading to potential losses for the fund.

Short Term Mutual Funds Returns

Short-term mutual funds often give better returns, around 8-9%, compared to traditional investments like fixed deposits. Their success depends on the fund’s mix of assets. Plus, they offer tax benefits that can make the returns after tax higher than other investment choices.

Short Term Mutual Funds Taxation

When you sell debt mutual fund units, gains are taxed as capital gains. If sold within 36 months, gains are considered Short-Term Capital Gains (STCG) and taxed according to your income tax slab. However, if held for 36 months or more, gains are considered Long-Term Capital Gains (LTCG) and taxed at a flat 20% rate with indexation, which can help reduce taxable gains.

How To Invest In Short Term Mutual Funds?

Here are steps to invest in short-term mutual funds via Alice Blue: 

1. Open a Demat Account

If you don’t have a Demat account, you must open one with Alice Blue by visiting the Alice Blue website.

2. Complete the KYC Process

You must complete the Know Your Customer (KYC) process per regulatory requirements. This involves submitting necessary documents such as identity proof, address proof, and PAN card. You may need to provide self-attested copies of these documents and a filled KYC form.

3. Log in to your Account

Once your account is set up and the KYC process is completed, you can log in to your account using your login credentials.

4. Explore Mutual Fund Options

You should be able to access the section related to mutual funds. Browse the available options and identify short-term mutual funds that suit your investment objectives and risk tolerance. 

5. Research and Select Funds

Research the short-term mutual funds you are interested in. Review their investment strategies, historical performance, risk factors, expense ratios, and other relevant information.

Best Short Term Mutual Funds

The list of best short-term mutual funds is given below in the table: 

Name of the fund NAV as ofMay 22, 2023Returns since inceptionExpense ratioMin. Investment
ICICI Prudential Short Term Fund Direct Plan-Growth₹ 55.258.6% p.a0.4% SIP ₹1000 &Lumpsum ₹5000
Aditya Birla Sun Life Short Term Direct Fund -Growth₹ 43.478.73% p.a.0.38%SIP ₹1000 &Lumpsum ₹1000
Sundaram Short Duration Fund Direct-Growth₹ 40.647.47% p.a.0.28%SIP ₹2000 &Lumpsum ₹5000
Nippon India Short Term Fund Direct-Growth₹ 48.428.16% p.a.0.36% SIP ₹105 &Lumpsum ₹105
Axis Short Term Direct Fund-Growth₹ 28.518.23% p.a.0.3%SIP ₹1000 &Lumpsum ₹5000
HDFC Short Term Debt Fund Direct Plan-Growth₹ 27.958.09% p.a.0.29%SIP ₹100 &Lumpsum ₹100
UTI Short-Term Income Direct-Growth₹ 28.67.36% p.a.0.34%SIP ₹500 &Lumpsum ₹10000
Kotak Bond Short Term Fund Direct-Growth₹ 48.568.08% p.a.0.36%SIP ₹1000 &Lumpsum ₹5000
SBI Short Term Debt Fund Direct-Growth₹ 28.977.84% p.a.0.34%SIP ₹500 &Lumpsum ₹5000
Bandhan Bond Fund Short Term Plan Direct-Growth₹ 51.897.88% p.a.0.3%SIP ₹1000 &Lumpsum ₹5000
Tata Short Term Bond Direct Plan-Growth₹ 45.17.55%0.38%SIP ₹500 &Lumpsum ₹5000
Mirae Asset Short Term Fund Direct – Growth₹ 14.146.86% p.a.0.32% SIP ₹1000 &Lumpsum ₹5000
DSP Short Term Direct Plan-Growth₹ 43.027.87% p.a.0.3%SIP ₹500 &Lumpsum ₹1000
Invesco India Short Term Fund Direct-Growth₹ 3,346.877.6% p.a.0.35%SIP ₹1000 &Lumpsum ₹1000
HSBC Short Duration Fund Direct-Growth₹ 23.867.72% p.a.0.27%SIP ₹1000 &Lumpsum ₹10000

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Short Term Mutual Funds – Quick Summary

  • Short-term mutual funds primarily invest in debt instruments with relatively short maturities, typically ranging from a few months to a few years.
  • These funds aim to provide investors with a balance between the low-risk nature of money market funds and the higher-risk profile of long-term bond funds.
  • The main objective of short-term mutual funds is to generate stable income and preserve capital over a short investment horizon.
  • Short-term funds primarily lend to reputable companies with a proven track record of timely loan repayment and sufficient cash flows to support their borrowing requirements.
  • The underlying securities in short-term mutual funds have shorter durations and lower interest rate risk than long-term bonds, offering stability and lower volatility.
  • These funds provide high liquidity, allowing investors to buy or sell their fund units at any time easily.
  • Investors can invest in short-term mutual funds by opening an account with Alice Blue.

Short Term Mutual Funds – Frequently Asked Questions

1. What are the short term mutual funds?

Short-term mutual funds are investment schemes that focus on assets with relatively short maturities, ranging from 15 to 91 days or even less, depending on the certain assets in which they invest. The average return on short-term mutual funds is 5.94%.

2. Are short term funds safe?

Investing in short-term funds helps you earn higher returns than a standard savings bank account. These funds carry relatively less risk because the securities they invest in have shorter maturity periods, reducing the exposure to potential market fluctuations.

3. Why short term funds?

Investing in short-term funds allows you to earn moderate returns with relatively low risk. These funds are highly liquid as they have shorter investment durations. Also, allocating a portion of your portfolio to short-term funds helps diversify your overall investment.

4. Is it good to invest short term?

Short-term investments are comparatively less risky than long-term investment options, making them a reliable choice for investors. These investments serve to diversify income sources, providing a safeguard against market volatility and fluctuations.

5. How do I invest in short term funds?

  • Open a Demat account with Alice Blue They offer a variety of investment services, including trading in stocks, commodities, and mutual funds. 
  • Understand your investment goals and your ability to take risks. 
  • Explore short-term funds available in the market and check their past performance, risk profile, etc. 
  • Choose the short-term funds that match your investment preference. 

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