Short Term Mutual Funds

  • Fixed Income Generating Fund, Irrespective of Market Fluctuations

  • Thoroughly Researched Funds HandPicked for Maximum Wealth Creation

  • Best Funds from top AMCs

  • Ideal for Short Term Investment Horizon
  • Invest one time or via SIPs

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Top Short Term Debt Mutual Funds In India

Here are the top-performing balanced funds/ hybrid mutual fund schemes in India:

Short Term Mutual Fund Name3-Year returns5-Year Returns
Reliance Prime Debt Fund7.65%8.16%
ICICI Prudential Short Term Fund7.6%8.4%
ICICI Prudential Savings Fund7.85%8.34%
Aditya Birla Sunlife Short Term Opportunities Fund7.86%8.51%
UTI Treasury Advantage Fund7.76%8.26%
Aditya Birla Sun Life Savings Fund8.08%8.52%
HDFC Short Term Debt Fund7.74%8.34%
IDFC Bond Fund7.21%7.88%
Kotak Corporate Bond Fund8.21%9.10%
L&T Short Term Bond Fund7.33%7.93%
IDFC Bond Fund – MTP -D5.17%5.67%
Kotak Dynamic Bond Fund9.10%8.78%
IDFC Bond Fund Short Term Direct Plan (Growth)7.92%8.54%

* Return Rates are Subject to change as per performance

What are Short Term Mutual Fund?

Mutual Fund Schemes enabling the customers with a short-term investment avenue of up to 4 years are generally termed as short-term mutual funds. These are financial schemes whose portfolio consists of securities offering a maturity period from 15 days up to a maximum of 91 days. This mutual fund scheme is an investment instrument that facilitates stable returns with low to moderate risk. This piece features a brief on the Short-Term Mutual Funds. These fund schemes have been specifically designed to earn stable returns over a short time period.

Many times, a Short Term Mutual Fund scheme has been compared to Fixed Deposits (FD) since the investment returns of both these schemes are very identical.

Even though the Short term debt funds are riskier instruments when compared with Fixed Deposits, in terms of tax efficiency, liquidity, as well as, stable returns, these mutual fund schemes edge out the fixed deposits.

Investors with very short horizons 15 days or less can opt for the liquid funds, whereas investors looking for a greater investment period say 2 to 3 months can choose from a wide-range of ultra-short-term funds. Debt fund investments have produced an annual return of 10% in contrast to fixed deposit schemes who yield a mere 7% of annualized returns.

In addition to this, the short-term mutual funds do not attract penalty on redemption before the maturity date, until and unless they are redeemed before a pre-determined period. In general circumstances, the pre-determined period ranges from 5 days to 6 months. In stark contrast to this, even though Fixed Deposits are high on liquidity a penalty of up to 1% is levied if FDs are redeemed before their maturity date.

Taxation of Short Term Mutual Funds

The short-term mutual funds have two categories are investment avenues within them namely, Dividend Option and Growth Option. The taxation of the growth option of short term funds is similar to that of a fixed deposit. The interest from these growth options short-term mutual funds is fully taxable in accordance with the income tax slab rates as per your income(calculated by adding income from the fund). For the dividend option, there is a tax-exempt option and furthermore, there is no tax on investment.

Short term Mutual Funds Returns Potential

The portfolio of the Short-Term Mutual Funds consists of debt and money market instruments of investment. The funds aim to achieve an attractive risk-adjusted returns profile which is achieved via tactical management of credit-risk and interest rate risk. As mentioned before, short term mutual fund tend to offer higher returns with respect to conventional banking options like a savings account or fixed deposit. The return rates from these mutual fund schemes generally range from 8-9% and in some cases could go as high as 10% depending upon the assets in the portfolio of the fund. Taking into consideration the tax benefits of these schemes, the investment returns from these schemes tend to be higher from the post-tax returns of many investment avenues.

According to the recent regulations issued by authorities, control over the high-duration scrips has been put into place which used to be a norm for short term debt funds. Restricting the duration scrips for 1-3 years has reduced the volatility and protection from unforeseen risks. Owing to these rule changes the short-term mutual funds are no longer exposed to exceptionally high-interest rate risks, though minimal credit rate risks might still creep in.

Types of Short-Term Mutual Funds

The Short-Term Mutual Funds have many categories of funds in them. These are listed as follows:

  • Liquid Funds
  • Floating Rate Funds
  • Corporate Bond Funds
  • Ultra Short Term Funds

Benefits of Short Term Funds

Here are some of the factors which are beneficial to the investors when they choose a short term mutual fund.

Stable Returns

We have already gone over the various kinds of Short-Term Mutual Funds that are available as investment avenues. The classification of the Short Term Funds is done based on the holding period of the funds. The variety of debt instruments and fixed income securities such as Treasury Bills, Government Securities, Money Market Instruments, etc all have different tax implications depending on the type of fund.

Debt funds are given a higher preference over equity funds as the fixed income securities and debt instruments usually offer a fixed rate of return and have been assigned a pre-determined maturity date. They are not at all affected by capital market movements.

Conservative Investors

The hybrid/ balanced mutual funds are one of the most stable and safe investment venues for people who are looking to create long-term safe-haven investment instruments for example retired people. Conservative Investors find balanced funds most suited to their profile since they allow for an investment in a balanced strategy which helps them get desirable outputs irrespective of the market position.

Portfolio Balancing

The short-term mutual fund scheme plays a pivotal role in the strategy for asset allotment. Many investors choose these over equity investments since the risk and capital erosion from capital markets over the past 3 years can be easily handled by these funds.

Financial Objectives Completion

As the name suggests, short term mutual fund will help you to achieve your short term objectives. The short-term mutual funds have a short span of investment and can help you to realize your short term financial goals. In addition to this, there is a long-term investment option in these funds of up to 4 years and more, which will help you with wealth generation and help you take the next steps towards finishing your financial objectives.

Risks with Short-Term Mutual Funds

Even though the short-term mutual funds have been associated with stable and moderate returns, they are still not entirely risk-free instruments. Here are the inherent risks of investing in short-term mutual funds.

Credit Risk Exposure

Credit Risk Exposures are likely to happen if and when you default on any payments. The Short term mutual fund schemes come with inherent credit risks. The credit ratings assigned to them by agencies indicate the inherent risk exposure an investor might be facing. High-Credit Rating indicates a low-risk exposure. You need to select a fund that invests in funds with high credit ratings.

Interest Rate Fluctuation

The returns of a particular mutual fund scheme are determined by the rate of interest. The higher interest rate will adversely impact the returns and will make a dent into your capital gains. The lower interest rate will do the exact opposite. Interest rate fluctuations are a part and parcel of trading with investment instruments in the financial markets. The interest rate fluctuations also have an impact on the price of mutual funds. The rise in interest rates will bring down the price, and a fall in the interest rates increases the price of mutual funds.

These factors of risk and benefits along with the taxation benefits interest rates etc should finally influence your decision to invest in the Short-Term mutual funds.