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Short Term Mutual Funds

A Short-Term Mutual Fund is an open-ended scheme that consists of investment in an asset that has a maturity of minimum 15 - 91 days or less.

For instance, Geeta is an expert investor on money market accounts. Her investment effort includes money accounts that go towards dairy industry. She purchases cattle as they are small in the fall of the seasons and feeds them through fall to spring and sells them in the month of April.

So, this is a short-term six-month investment that we are looking at. It will deliver profits in a year, at low risk and low returns. This explains the short-term investment as an investment which becomes cash in a yearand is considered liquid. When a person makes investment in short-term stock, the psychology is that these assets can be cashed in quickly.

Such funds are ideal for low risk investment. If you wish to invest funds for a short duration (15 days or less), you can go for liquid funds and if you wish to invest funds with a maturity period of 2 months to 4 months, you can opt for ultra-short-termmutual funds.

Returns potential of Short Term Mutual Funds?

When compared to bank deposits such as savings account and fixed deposits, short-term funds offer bigger returns for investments that were held for a small duration. The percentage of returns range from 8%-9%, as per the assets in your short-term mutual fund portfolio. As with attractive tax benefits, the overall return on investment is higher than the post-tax returns earned from other investment schemes.

How are short term mutual funds taxed?

Short-term mutual funds are available as growth option and dividend option

Growth Option or Dividend Option:

  • When the investor opts for the growth option, the tax treatment will be similar to that of bank fixed deposits. The income from the funds will be counted as part of the investor’s overall income earned and taxed as per it.

  • When the investor goes for a dividend option, the income earned from the investment is exempt from tax.

Top 10 Short Term Mutual Funds

Top 10 Short Term Mutual FundsInvestment ObjectiveAsset Size as on 30th June 2018Returns generated
HDFC Medium Term Opportunities Fund – Growth OptionThe objective here is to generate regular income through debt and money market investments and government securities with maturities not more than 60 months.12,404.06 (Rs. in crore)8.63%
Aditya Birla Sun Life Short Term Fund – Discipline Advantage PlanThe objective of the scheme is to generate optimal returns with high liquidity through active management of the portfolio by investing in High Quality Debt and Money Market Instruments.20.461 (Rs. In crore)9.31%
ICICI Prudential Banking and PSU Debt Fund – GrowthTo generate income through predominantly investing in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds while maintaining the optimum balance of yield, safety and liquidity. 5590.26 (Rs. In crore)8.51%
Aditya Birla Sun Life Short Term Fund – Growth – Regular PlanThe investment objective of the scheme is to generate optimal returns with high liquidity through active management of the portfolio by investing in High Quality Debt and Money Market Instruments.15,653.87 (Rs. In crore)9.31%
ICICI Prudential Short Term – Growth OptionReturns from investments from debt and money market instruments. At the same timeretain optimum balance inyield. Remember there is no guarantee that the investment objective will be achieved.8,330 (Rs. In crore)8.04%
Aditya Birla Sun Life Short Term Fund – Growth – Regular PlanThe primary objective of the scheme is to generate regular income through investment in a portfolio comprising of money market instruments.15,654 (Rs. In crore)9.31%
DHFL Pramerica Short Maturity Fund – GrowthThe investment objective of the Scheme is to seek to generate returns with low to medium market risk for investors by investing in a portfolio of short -medium term debt and money market securities.Rs. 1,530 (Rs. In crore)7.81%
Aditya Birla Sun Life Short Term Opportunities Fund – Growth – Regular PlanThe investment objective of the scheme is to generate income and capital appreciation by investing 100% of the corpus in a diversified portfolio of debt and money market securities.Rs. 4,184 (Rs. In crore)7.29%
ICICI Prudential Banking and PSU Debt Fund Retail GrowthThe Scheme seeks to generate income through predominantly investing in Debt instruments of banks, Public SectorRs. 1362.43 (Rs. In crore)7.29%
Aditya Birla Sun Life Treasury Optimizer Plan – Regular Plan – GrowthThe investment objective of the Scheme is to generate income and capital appreciation by investing 100% of the corpus in a diversified portfolio of debt and money market securities with relatively low levels of interest rate risk.Rs. 1715.26 (Rs. In crore)8.55%

Interest Risk

Interest rate risk is associated with investment based on interest rate cycle. Interest rates are inversely related to debt instrument prices.Making them opposites when functioning. This is whya fall in the interest rate works well for debt mutual funds. Similarly, decreasing interest rates raise bond prices and enhance NAVs of the schemes.

If you take a not so wise decision on the interest rate variation and invest in a debt mutual fund scheme for profits sake, you may end up with losses.Likewise, a wrong decision by your fund manager will mean that your scheme suffers. An instance would bea declining interest rate being considered goodfor long run debt mutual fund policy. When you invest in a long run.

FAQs on Short Term Mutual Funds

What Should I know regarding my long-term mutual fund investment plan.

If you want to take the advantage of interest rate cycles over a long period of time, opt for a Dynamic bond fund.

What should be my first move towards safeshort-term mutual fund investment?

Investment experts ask investors to shortlist schemes first, based on their investment horizon.

Risk Reduction Mantra for Me

Choose liquid funds for a short horizon. Here interest rate risk and credit risk are almost nil.Choose credit opportunity fund for 3-year return horizons.

How Should I maximise good investment opportunities?

Keep good credit rating. It will help you to reduce the credit risk. Such policy carriers release the portfolio of the mutual fund schemes 3-4 times every year.

What is an Ultra Short-Term Fund?

These investments are made into fixed-income instruments that are largely liquid and are backed up by a short-term maturity. While Ultra Short-Term Funds go towards helping investors overcome risky interest rates, they also promise improved returns compared to other instruments.

What are short term bond funds?

Short-term bond funds are funds that invest in bonds for a duration spanning less than 5 years. These can be in the form of investments in commercial papers, certificates of deposits, etc. Rates of interest given by these funds are lower in comparison to long-term bond fund since there is limited maturity period in these short-term bonds.

What is short term debt fund?

Short-term debt fund is an investment option for individuals interested to invest for a shorter duration. The short-term debt funds, also called income funds, is a mutual fund scheme with a shorter holding or maturity period of less than 3 years.

What is the best investment option for short term?

Some of the best options for short term investment are:

A. Bank Fixed Deposits – 7 days to 10 years

B. Savings Account – No Tenure

C. Money market Accounts- 1 day to 90 days or more

D. Gold or Silver – Any Tenure

E. Short Term Debt Funds - 1 to 6 Months

F. Large Cap Mutual Funds – Minimum 36 months

What is a short-term mutual fund?

These are mutual fund plans whose maturity ranges from 15 to 91 days or less. The maturity of the short-term mutual fund depends totally on assets. This is a good option for those who want in invest in assets with a low risk.

Can we invest in mutual funds for 3 months?

For a 3 to 6 months period, one can park the money in liquid mutual funds / ultra-short-term debt mutual funds. Most of the time, liquid mutual funds invest in government securities & certificate of deposits with as much as a 3-month tenure. An investor can enter and exit at mostly without any exit load.

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