Last Updated on Mar 13, 2023 by Anjali Chourasiya
When it comes to mutual funds, there are a number of different options available to investors looking for funds that will provide them with short term returns. In this article, let’s take a closer look at some of the best short term mutual funds available on the market, factors to consider before investing in them, advantages, how they work, taxation of short term mutual funds, and more.
Table of Contents
What are short term mutual funds?
Short term mutual funds are a type of Debt mutual fund with a limited maturity period. These funds invest in low-risk, high-quality securities, especially the ones with a proven record of repaying their loans on time and having enough cash flows from their business to justify the borrowings. The short term mutual funds are considered an alternative to a savings bank account and fixed deposits as their returns are slightly better and have high liquidity.
Within short term mutual funds, there are a few types. For instance, if you are looking to invest for less than 91 days, you can opt for liquid funds. For a tenure of 3-6 months, you can opt for ultra short term bond funds. For 6-12 months, opt for low-duration funds, and for an investment horizon of 1-3 yrs, opt for short-duration funds.
Key features of short term mutual funds
|Definition||Low-risk, high-quality funds with a limited maturity period|
|Maturity tenure||Duration varies for different funds from 91 days to 3 yrs|
|Risk||On the lower side, due to the shorter maturity period of the underlying securities|
|Returns||Higher in comparison with Fixed Deposits and a savings bank account|
|Suitable for||Risk-averse investors|
Best short term mutual funds in 2023
|Name||AUM (Rs. in cr.)||Absolute Returns – 1Y (%)||3Y Avg Annual Rolling Return (%)||Expense Ratio|
|IDBI ST Bond||29.61||3.98||8.22||0.28|
|UTI ST Income Fund||2,264.43||4.91||7.62||0.33|
|ICICI Pru Short Term Fund||14,589.51||6.31||7.57||0.39|
|Aditya Birla SL Short Term Fund||5,045.21||5.33||7.43||0.38|
|HDFC Short Term Debt Fund||10,773.95||4.51||7.08||0.29|
|Nippon India Short Term Fund||5,147.42||4.11||7.08||0.34|
|Axis Short Term Fund||7,096.45||4.71||7.05||0.31|
|Kotak Bond Short Term Fund||12,465.18||4.12||6.78||0.35|
|Tata ST Bond Fund||2,271.32||4.44||6.55||0.37|
|SBI Short Term Debt Fund||13,289.80||4.25||6.39||0.34|
Note: The data is from 8th March 2023 and sorted using Tickertape Mutual Fund Screener using the following parameters:
- Category > Debt > Short Duration Funds
- Absolute Returns 1-yr
- 3-yr Average Annual Rolling Returns: Sort using this parameter (high to low)
Details of mutual fund for short term
IDBI ST Bond
This small-cap fund is managed by IDBI Mutual Fund, one of the profit-making AMCs in the space with an asset base of over ₹5,300 cr. It is trading at Rs. 25.05 as of 8th March 2023. The fund’s AUM is Rs. 29.61 cr., its 3-yr average annual rolling return is 8.22%, the highest in this list, and its expense ratio is 0.28%.
UTI ST Income Fund
This mid-size fund by UTI Asset Management Company sits on an AUM of Rs. 2,264.43 cr. It has a NAV of Rs. 27.92 as of 8th March 2023 and an expense ratio of 0.33%. The 3-yr average annual rolling return is clocked at 7.62%.
ICICI Pru Short Term Fund
This fund is managed by ICICI Prudential Asset Management Company Ltd. It is trading at Rs. 53.98 as of 8th March 2023. The fund’s AUM is Rs. 14,589.51 cr., its 3-yr average annual rolling return is 7.57%, and its expense ratio is 0.39%.
Aditya Birla SL Short Term Fund
Having an AUM of Rs. 5,045.21 cr., this fund is managed by Aditya Birla Sun Life AMC Limited, which is a joint venture between the Aditya Birla Group and Sun Life Financial Inc. of Canada. It trades at a NAV of Rs. 42.43 as of 8th March 2023. While the expense ratio of the fund is 0.38%, the 3-yr average annual rolling return is 7.43%.
HDFC Short Term Debt Fund
This large-cap fund by HDFC Asset Management Company sits on an AUM of Rs. 10,773.95 cr. It has a NAV of Rs. 27.28 as of 8th March 2023 and an expense ratio of 0.29%. The 3-yr average annual rolling return is clocked at 7.08%.
Nippon India Short Term Fund
Having an AUM of Rs. 5,147.42 cr., this fund is managed by Nippon India Mutual Fund is one of India’s leading mutual funds, with Average Assets Under Management (AAUM) of Rs. 2,79,431 cr. It trades at a NAV of Rs. 47.19 as of 8th March 2023. While the expense ratio of the fund is 0.34%, the 3-yr average annual rolling return is 7.08%.
Axis Short Term Fund
This large-cap fund by Axis Asset Management Company Ltd. It is a mutual fund investment wing of Axis Bank, the 3rd largest private bank in India. The fund sits on an AUM of Rs. 7096.45 cr. It has a NAV of Rs. 27.79 as of 8th March 2023 and an expense ratio of 0.31%. The 3-yr average annual rolling return is clocked at 7.05%.
Kotak Bond Short Term Fund
This large-cap fund is managed by Kotak Mahindra Asset Management Company Limited (KMAMC). The scheme has a NAV of Rs. 47.35 as of 8th March 2023 and an expense ratio of 0.35%. The fund sits on an AUM of Rs. 12,465.18 cr. It has a 3-yr average annual rolling return of 6.78%.
Tata ST Bond Fund
Having an AUM of Rs. 2,271.32 cr., this fund is managed by Tata Asset Management Private Ltd. (TAMPL). It trades at a NAV of Rs. 43.96 as of 8th March 2023. While the expense ratio of the fund is 0.37%, the 3-yr average annual rolling return is 6.55%.
SBI Short Term Debt Fund
Having an AUM of Rs. 13,289.80 cr., this fund offered by SBI Funds Management Ltd (SBIFML) trades at a NAV of Rs. 28.27 as of 8th March 2023. While the expense ratio of the fund is 0.34%, the 3-yr average annual rolling return is 6.39%.
Factors to consider before investing in the best short term mutual funds
Though short term mutual funds look like a good investment option, you must consider the below-mentioned factors before investing in them.
Depending on your investment objective and plan, you must choose whether to invest in the best short term funds. Aligning your investment objective with the funds objective is important. Hence, define your goal, set a plan and then decide on investment instruments accordingly.
Each category of mutual funds caters to different investment horizons. Therefore, based on your goals and investment plan, look for funds that cater to your needs. If your goals are for three years or less, you can consider mutual funds for short term investment.
One of the most important factors to consider in mutual funds is the expense ratio. It is the amount charged by the fund house for managing the fund. The Securities Exchange Board of India (SEBI) had capped the expense ratio for debt funds at 2.25%, which is lower as compared to equity funds. As the charges are lower, the returns for debt funds are comparatively higher. Hence, considering the expense ratio of every fund before investing is a wise choice.
Portfolio diversification is the key to earning good returns and avoiding risk. Therefore, diversify instruments in your portfolio that are best suited for your goals. You can break down your goals based on the time horizon and then choose the investment instruments accordingly.
Past performance of the fund
Past performance can be a good indicator in analysing the present and future returns of a fund. However, they do not guarantee accurate results. Hence, do not rely completely on past performance. It is worthwhile to take the help of a financial expert to get a detailed analysis of the fund and your suitability for the portfolio.
One of the important considerations when investing in short term mutual funds is the tax implication. The growth option of these funds is taxed as per the investor’s slab rate, which can significantly impact the returns from the investment.
One of the best ways to determine if the fund is aligning with your investment goal is to evaluate the fund’s holdings. Some funds may invest significantly in high-quality securities, meaning they offer stability and moderate returns. Other funds might be pivoted towards securities with a low credit rating, promising more sizeable returns.
The risk profile of a mutual fund is another important factor to consider before investing. For Debt funds, evaluate liquidity risk, credit risk, and interest rate risk.
Advantages of short term mutual funds
- They are ideal for passive investors. If you don’t need the money for at least 12 to 18 months, you can consider putting them in short term mutual funds.
- Best funds for short term investment tend to deliver better returns than Fixed Deposits while keeping risk under control.
- The short term mutual funds are more tax-efficient than Fixed Deposits and traditional savings accounts if held for three or more years.
- Short-term mutual funds are highly liquid investments, meaning investors can easily buy or sell their units at any time without incurring any high costs or penalties.
How do short duration funds work?
Short-term mutual funds work by pooling money from multiple investors and investing it in a portfolio of short-term debt securities such as government securities, corporate bonds, and money market instruments.
The fund manager is responsible for selecting the best securities according to the fund objective. They also manage the fund portfolio to generate good returns while minimising risks. You can check the fund’s performance by looking at its Net Asset Value (NAV), which is calculated by subtracting the fund’s expenses from the value of the securities held in the portfolio. As an investor, you can buy and sell units of the mutual fund at its current NAV.
Short-term mutual funds typically have a maturity period of 1 to 3 yrs, which means that the securities held in the portfolio mature within this timeframe. This makes short-term mutual funds less volatile than long-term mutual funds that invest in equities and a lower-risk investment option for investors seeking to park their funds for a short period of time.
Investors should carefully consider their investment goals and risk tolerance before investing in a short-term mutual fund. It’s important to review the fund’s investment objective, past performance, fees, and other factors before making an investment decision.
Who should invest in short term mutual funds?
- Investors with an investment horizon of at least 1-yr or 1 to 3 yrs.
- Passive investors or investors seeking regular income.
- Investors looking for alternative short-term savings instruments than savings accounts and Fixed Deposits.
- First-time investors in Debt funds
- Risk-averse investors
- Investors seeking high liquidity and tax efficiency
Taxation on short term mutual funds
You can earn dividend income and capital gains from short term mutual fund investments. Both of them are taxable. Dividend income is taxable as per the tax bracket you fall into. For capital gains, tax is applied based on short term capital gains and long term capital gains.
Short Term Capital Gains (STCG): The minimum holding period for this type of gain in Debt funds is less than 36 months. If you sell the fund unit before three years, STCG in debt mutual funds are taxed as per the applicable tax rate of the investor. Therefore, if your tax rate is 20%, then short term capital gains tax on debt funds is 20% + 4% cess.
Long Term Capital Gains (LTCG): For debt funds, the minimum holding period for LTCG is 36 months or longer. The long term gains for debt funds are taxed at 20% with cess and surcharges.
For a better understanding of capital gain tax on debt mutual funds, refer to the below-mentioned table:
|Points of comparison||Short term capital gains||Long term capital gains|
|Duration||Shorter than 36 months||36 months or longer|
|Tax||Taxed at the investor’s income tax slab rate||20% + cess + surcharge|
How to choose the best short term mutual funds?
To get the best mutual funds for short term investment, Tickertape Mutual Fund Screener is your partner.
The first step when looking for the best funds for short term investment is defining the parameters you are going to use to get the list. Tickertape Mutual Fund Screener offers you over 50 filters to get the best mutual funds from 100s available in the market. You can filter the funds based on the payout structure – growth, dividend – IDCW (Income Distribution Capital Withdrawal), and bonus. Additionally, you can also filter funds based on the scheme info (AMC, lock-in period, exit load, fund manager, NAV, and SIP Investment), returns, risk, portfolio composition, and ratios.
Using all the filters, you can get the list of the best short term funds based on your preferred criteria. You can add those funds to your watchlist or, alternatively, create a Universe for short term funds. Moreover, you can export the data and analyse it separately. You can even create a custom filter.
Additionally, you can perform individual analysis of the fund. This has all the important information you need about a mutual fund, like about the fund manager, its peers, portfolio, opinions and fund reviews. Here’s the asset page of ICICI Pru Short Term Fund –
Begin your investment journey today by logging on to Tickertape. Research, analyse, invest, and review your portfolio from our platform without even requiring to switch tabs in between. Connect your portfolio and utilise our portfolio analysis tools to get a better understanding. Before investing, ensure you understand mutual funds and their types and then proceed to analyse the fundamentals of a fund. Not just that, but keep your investment goals and risk appetite in mind. Happy screening and investing!
Short term mutual funds are low-risk, high-quality funds with a limited maturity period. They are best suited for risk-averse investors, passive investors, people seeking regular income and investors with an investment horizon of at least 1-yr or 1 to 3 yrs. To get the list of mutual funds best suited for you, use Tickertape Mutual Fund Screener. With over 50 filters, custom filters, the custom universe, individual analysis, and more, Tickertape makes your research, analysis, and investment journey easy. Sign up today!
Can I invest in mutual funds for 6 months?
Yes, one can invest in mutual funds for six months. For this time horizon, you can consider ultra short term funds and liquid funds.
Where do short term funds invest?
Short term mutual funds invest in a wide range of debt instruments such as corporate bonds, government securities, derivatives, bonds issued by financial institutions, and more. They also hold a part of their portfolio in money market instruments to maintain liquidity.
Which mutual fund is best for the short term?
As per the data of 8th March 2023, the below-mentioned mutual funds are the best for the short term. They are listed on the basis of 3-yr Average Annual Rolling Returns (high to low) and are filtered among 100s of mutual funds using the Tickertape Mutual Fund Screener.
1. IDBI ST Bond
2. UTI ST Income Fund
3. ICICI Pru Short Term Fund
4. Aditya Birla SL Short Term Fund
5. HDFC Short Term Debt Fund
6. Nippon India Short Term Fund
7. Axis Short Term Fund
8. Kotak Bond Short Term Fund
9. Tata ST Bond Fund
10. SBI Short Term Debt Fund
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