Short-Term Mutual Funds

Short-term Mutual Funds are designed to offer a balance between liquidity and returns, making them suitable for investors seeking moderate income with lower interest rate risk.
EXPLORE FUNDS
What are Short term Mutual Funds
EXPLORE FUNDS
3 mins read
08-October-2024

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.

Read on to learn all about short term mutual funds, short term mutual funds meaning, short term mutual funds types and how short term mutual funds work.

What are short term mutual funds?

Short-term or short-duration mutual funds are flexible investment vehicles with maturity periods spanning from 1 year to 3 years, tailored to the maturity periods of underlying instruments. These funds primarily allocate to high-quality, low-risk assets like debt securities, money market instruments, and government bonds, making them ideal for risk-averse investors. These funds offer investors an opportunity to earn potentially higher returns than traditional savings accounts or fixed deposits while maintaining relatively low risk.

How do short term mutual funds work?

Short-term mutual funds concentrate on a diversified assortment of short-term fixed-income securities. Here's how they function:

Investment portfolio

In India, Short-term Mutual Funds construct diversified portfolios consisting of money market instruments, certificates of deposit, and short-term government and corporate bonds.

Maturity period

These funds prioritize securities with shorter maturities, typically ranging from 6 months to 3 years. This approach mitigates interest rate risk, rendering them less susceptible to market fluctuations.

Risk management

Strategic allocation of assets with shorter durations aims to minimize interest rate risk, providing investors with a more stable investment alternative compared to longer-term instruments.

Balancing stability and returns

Short-term Mutual Funds seek to strike a balance between the stability offered by Fixed Deposits and the potential for higher returns from longer-term investments. This appeals to investors with moderate risk appetites.

Flexibility

Fund managers can swiftly adjust to evolving market conditions, ensuring portfolio flexibility that aligns with the Reserve Bank of India's monetary policies and interest rate shifts.

Liquidity and capital preservation

In the Indian market, investors often opt for these funds for liquidity, capital preservation, and reasonable yields, particularly during periods of economic uncertainty.

Advantages of short-term funds

Investing in some of the best short-term funds offers several benefits:

Short-term mutual funds come with several benefits that make them an attractive option for investors:

  • Safety: These funds primarily invest in low-risk securities, focusing on preserving your capital while offering modest returns, making them a secure choice for cautious investors.
  • Liquidity: One of the key advantages is high liquidity, allowing you to access your funds quickly without major penalties, making them ideal for emergency funds or short-term goals.
  • Steady Returns: While they don't promise high returns, short-term mutual funds aim for stability, providing consistent and reasonable returns with minimal volatility.
  • Diversification: These funds spread investments across various instruments, reducing the risk tied to any single asset, which helps protect your portfolio from significant market fluctuations.
  • Low Minimum Investment: Short-term mutual funds generally have low entry points, making them accessible to a wide range of investors, including those with smaller budgets.

Types of short-term mutual funds

Here are some types of short-term mutual funds:

Type

Investment Focus

Risk Profile

Suitability

Liquid funds

Treasury bills, commercial Paper

Very low

Parking short-term funds, emergency buffer

Ultra short-term funds

Certificate of deposits (CDS), money market instruments

Low

Short-term goals (1-3 years), emergency funds

Money market funds

Treasury bills, commercial paper, CDS

Very low

Capital preservation, parking surplus cash

Short-term debt funds

Corporate bonds, debentures

Low to moderate

Moderate returns for short-term goals (2-4 years)

Fixed Maturity Plans (fmps)

Fixed-income securities

Low to moderate

Specific investment horizons, predictable returns

 

Short-term mutual funds duration

Short-term mutual funds have maturity periods spanning from as brief as 91 days to as extensive as 3 years. Varieties of short-term mutual funds exist, categorised by their duration. Liquid funds, for instance, cater to investments of fewer than 91 days, while ultra-short-term bond funds span 3 to 6 months. Low-duration funds suit 6 to 12-month investments, and short-duration funds prove optimal for horizons extending from 1 to 3 years.

Short-term debt funds vs short-term bond funds

Short duration debt funds primarily invest in a diversified portfolio of debt securities with short-term maturities, while short duration bond funds focus on investing in corporate bonds and other fixed-income securities with relatively short durations. Both types of mutual funds aim to provide investors with stable income and capital preservation over the short term.

Short-term mutual funds taxation

Upon selling debt mutual fund units, the resulting profits are subject to taxation as capital gains. Should the sale occur within a 36-month timeframe, these gains are categorised as Short-Term Capital Gains (STCG) and taxed based on the individual's income tax slab. Conversely, if the units are held for 36 months or beyond, the gains are identified as Long-Term Capital Gains (LTCG) and subjected to a fixed 20% tax rate with indexation, offering potential mitigation of taxable gains.

Risks of short-term funds

  • Interest rate risk: Interest rate risk refers to the potential decline in the value of securities within a short-duration fund's portfolio resulting from an increase in interest rates. As interest rates climb, the value of the underlying sec Asset Value (NAV).
  • Credit risk: Short duration funds may invest in lower-rated or unrated debt securities, exposing investors to credit risk. While higher-yielding securities offer the potential for higher returns, they also carry a higher risk of default.
  • Diversification: Investors should consider the diversification strategy of the fund to ensure that it is well-diversified across different issuers, sectors, and credit ratings to mitigate risks associated with individual securities.
  • Monitoring the fund: Investors should regularly monitor the performance of the short duration fund and review its portfolio holdings to ensure alignment with their investment objectives and risk tolerance.
  • Liquidity risk: Liquidity risk in short-term funds is the challenge of fulfilling immediate financial needs because of cash shortages or struggling to convert assets into cash without major losses. Managing it well means keeping liquid assets, accurate cash flow predictions, and spreading funding sources.
  • Inflation risk: Inflation risk in short-term funds arises when rising inflation prompts central banks to increase short-term interest rates, impacting bond yields.Investors may prefer shorter-term papers during inflationary periods.

 

How to invest in short-term mutual funds

Step 1: Visit the Bajaj Finserv website or download the app from Google Play Store or App Store

Step 2: Navigate to 'Investments' and click on 'All Investments' on the home page

Step 3: Click on 'Mutual Funds' icon

Step 4: Click on 'Explore Funds'. You will be redirected to the mutual funds listing page

Step 5: Filter by scheme type, risk appetite, returns, etc. or choose from the top performing funds list

Step 6: All the mutual funds of the particular category will be listed, along with the minimum investment amount, annualised return, and rating

Step 7: Click on 'Invest Now'

Step 8: Enter your mobile number and sign in using the OTP

Step 9: Verify your details using your PAN, date of birth. If your KYC is not complete, then you will have to upload your address proof and record a video

Step 10: Enter your bank account details

Step 11: Upload your signature and provide some additional details to continue

Step 12: Choose and select the mutual fund that you want to invest in

Step 13: Choose whether you want to invest as SIP or lumpsum and enter the investment amount. Click on ‘Invest Now’

Step 14: Select your payment mode i.e., net banking, UPI, NEFT/ RTGS

Step 15: Once your payment is done, the investment will be complete

Your investment will start reflecting in your portfolio within 2-3 working days.

Things to consider before investing in short-term funds

Before investing in short duration funds, investors should consider the following factors:

  • Investment objective: Determine whether the fund's investment objective aligns with your financial goals and risk tolerance.

  • Expense ratio: Evaluate the fund's expense ratio, which represents the annual operating expenses deducted from the fund's assets. Lower expense ratios translate to higher returns for investors.

  • Fund manager expertise: Assess the track record and expertise of the fund manager managing the short duration fund. A skilled and experienced fund manager can effectively navigate market conditions and optimise returns for investors.

Conclusion

Short-term duration mutual funds offer investors an attractive investment option to earn stable income and preserve capital over the short term. With their exposure to diversified portfolios of fixed-income securities, short duration funds provide investors with the potential for higher returns compared to traditional savings instruments. However, investors should carefully evaluate the risks and considerations associated with short duration funds and consider seeking professional advice before making investment decisions. By understanding the fundamentals of short duration funds and conducting thorough research, investors can make informed investment choices aligned with their financial objectives and risk appetite.

Essential tools for all mutual fund investors

Mutual Fund Calculator

Lumpsum Calculator

Systematic Investment Plan Calculator

Step Up SIP Calculator

SBI SIP Calculator

HDFC SIP Calculator

Nippon India SIP Calculator

ABSL SIP Calculator

Frequently asked questions

What are short-term mutual funds?

Short-term mutual funds are investment vehicles that primarily invest in debt securities with relatively shorter maturity periods, typically ranging from a few months to a few years. These funds aim to provide investors with stable returns over a short investment horizon while preserving capital and minimising volatility. Short-term mutual funds offer diversification across a range of fixed-income instruments, including treasury bills, corporate bonds, and money market securities.

Are short-term funds safe?

Short-term funds are generally considered safer than equity funds due to their focus on fixed-income securities, which offer stability and predictability in returns. However, they are subject to credit risk, interest rate risk, and liquidity risk associated with the underlying securities, making them not entirely risk-free. Investors should carefully assess the risk profile of short-term funds and align them with their investment objectives and risk tolerance.

What is the advantage of using short term funds?

Short-term funds offer investors the potential for higher returns compared to traditional savings accounts or fixed deposits, albeit with relatively lower risk than equity investments. They provide liquidity, allowing investors to access their funds quickly in case of emergencies or short-term financial needs. Short-term funds also offer flexibility in investment duration, catering to investors with varying investment horizons and risk appetites.

Do short-duration funds have an exit load?

Short-duration funds may or may not have an exit load, depending on the fund's specific terms and conditions. Some short-duration funds impose an exit load if units are redeemed before a specified holding period, typically ranging from a few days to a few months. Investors should review the fund's offer documents to understand the exit load structure and its impact on returns.

Can we do SIP in short-term debt funds?

Yes, investors can invest in short-term debt funds through a Systematic Investment Plan (SIP), which allows them to invest fixed amounts at regular intervals. SIPs offer the benefit of rupee cost averaging and disciplined investing, enabling investors to accumulate units of short-term debt funds over time. SIPs in short-term debt funds provide investors with a convenient and systematic approach to building wealth while managing risk.

What is the maturity of short term funds?

The maturity of short-term funds typically ranges from a few months to a few years, depending on the specific type of fund and its investment objectives. These funds aim to provide investors with relatively quick returns while minimising exposure to long-term market fluctuations.

Is there any 3-month mutual fund?

Yes, there are mutual funds with investment horizons as short as three months. These funds, often categorised as ultra-short-term or liquid funds, invest in highly liquid assets with short maturities, making them suitable for investors seeking short-term parking of funds with minimal risk.

How long is short-term funds?

Short-term funds typically have investment horizons ranging from a few months to around three years. The exact duration can vary depending on the specific fund's investment strategy and objectives, but they generally aim to provide relatively quick returns while minimising exposure to long-term market risks.

What is the difference between duration and maturity?

Duration and maturity are both measures used to assess the risk and performance of fixed-income securities. Maturity refers to the length of time until the principal amount of a security is repaid, while duration measures the sensitivity of a security's price to changes in interest rates. While maturity is an absolute measure, duration is a relative measure of risk.

How many months is short term?

The definition of "short term" can vary depending on the context, but it typically refers to a duration of less than one to three years. In the financial markets, short-term investments or funds often have maturity periods ranging from a few months to a few years, providing investors with relatively quick returns and liquidity.

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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

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