Short Term Mutual Funds
22 Nov 2021

Short Term Mutual Funds

A complete guide on what is Short Term Mutual Funds – their features & benefits.

Key Takeaways

  • Short Term Mutual Funds allow you to invest in debt securities with shorter maturity periods.
  • Fund managers invest capital in money market instruments and debt funds.
  • The reduced maturity period helps balance the associated risks and combat volatile interest rates.
  • Taxation levied depends upon the holding period of the units in question.
  • These Mutual Funds are Suitable to meet short-term financial goals and can offer decent returns.

The Securities and Exchange Board of India (SEBI) has classified and segregated Mutual Funds into several different types. As an investor, you can pick from various kinds of Mutual Funds to meet your financial requirements. One of the SEBI categories is Short-Term Mutual Funds, which help you achieve your short-term investment goals. Let us understand this type of Mutual Fund in detail.

What Is Short-Term Mutual Funds?

A Short-Term Mutual Fund is a type of Debt Mutual Fund with a limited maturity period. These are funds with maturity tenures lasting from 1-3 years. You may also choose Ultra Short-Term Mutual Funds with a maturity period of 3-6 months. With these funds, fund managers invest capital into money market instruments and debt funds.

Short Term Mutual Funds – The Salient Features

Asset Allocation

As per SEBI guidelines, you may invest up to 50% of total assets in debt instruments for the short term. You may also invest up to 50% in foreign securities and up to 20% in securities lending.

Risk-Reward Ratio

Short-term Mutual Funds carry a certain amount of risk, but the limited maturity period offsets such concerns. While you may not be averse to credit risk, liquidity risk, and interest rate risk, you stand to earn returns of 7-9% with well-managed Short and Ultra Short Term Mutual Funds.

Tax Implications

You must pay a Short-Term Capital Gains (STCG) tax on short-duration funds because the holding period does not exceed 3 years. The STCG rate is 15%, irrespective of your tax slab. Since you cannot hold Short-Term Mutual Funds for tenures exceeding three years, Long Term Capital Gains tax of 20% plus indexation benefits does not apply to it.

Advantages of Investing in Short Term Mutual Funds

High Liquidity

With these funds, you can rely on sufficient liquidity. You can withdraw your invested amount any time after investing. However, be mindful of exit loads when you do so.

Short-Term Goals

You can invest in Short Term Mutual Funds at any time, which is especially useful while fulfilling short-term financial goals. If you have an investment horizon of up to 1-3 years, these funds can help you meet your short-term investment objectives and benefit significantly.

Safety from Volatility

Investing in Short Term Mutual Funds, with reduced Macaulay durations can help you offset the risks presented by interest rate volatility.

Sufficient Returns

Compared to other investment funds that allow you to invest in securities with shorter maturity periods, Short Duration Mutual Funds provide more significant returns.

Final Note

Now, you can invest in the best Short Term Mutual Fund via the digibank app and internet banking platforms. You can check the Morning star accredited credit ratings for each Mutual Fund Scheme before choosing your preferred scheme. Also, remember to check the fund manager at the helm of the fund and their past performance while managing funds. Finally, consider your investment goals, horizons, risk appetite, and the expense ratios associated with the fund before investing.

Download digibank to explore the different mutual funds on offer and even open your savings account with us.

*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.