Last Updated on Jun 6, 2022 by Nikitha

There is a misconception that investments serve only long-term goals. But investments come in all shapes and sizes. Short-term goals are meant to be achieved in the 3 yrs and there are certain options that are particularly designed to fulfil them. Rather than leaving your money idle in a bank account, you can consider investment options like short-term mutual funds. 

Let us discuss the working of short-term mutual funds along with the benefits and associated risks.

What are short-term mutual funds? 

Mutual funds are one of the famous investment options wherein a fund manager pools funds of several individuals in the market and invest them in various asset classes. Short-term mutual funds is one such scheme that comes with a short maturity period of not more than 3 yrs. These are also referred to as short-term debt funds or income funds. 

As the name suggests, short-term debt funds invest in companies for a short period of 1 – 3 yrs. The fund manager picks companies with a good track record in terms of debt clearance and has good cash flow. 

Short-term mutual funds predominantly include low credit risk instruments. Thus, this category of mutual funds is an excellent investment destination for risk-averse investors who seek stable, short-term returns. However, it is important to go through each and every detail of an investment before investing in one. 

Who should invest in short-term mutual funds? 

The key lesson for an investor is – not all the investments suit everyone. Short-term mutual funds are best suited for investors who plan to invest their money for a shorter period. Short-term funds are an alternative to depositing your money in your savings account. As they may help you earn higher returns than the interest rates provided by banks and improve liquidity. 

These funds can also help you earn returns in the short term and reduce your investment risks. You may consider a portfolio that comprises high-grade assets and low downside risks. Generally, short-term mutual funds carry relatively lower risk because of the short maturity periods of their securities.

Benefits of short-term mutual funds

The benefits of short-term debt funds are: 

  • Investors can expect stable returns as the impact of interest rate changes is less on short-term debt funds. 
  • As there is no lock-in period, investors can exit the short-term debt funds whenever they want to. 
  • The taxes levied on returns from the short-term debt funds are less when compared to the profits earned on the fixed deposits. 
  • The investor can earn a better profit on the short-term debt funds than what is offered on a savings account. 
  • It can be a good fit in the diversified portfolio that balances debt and money market instruments and provides optimal returns 

Risks of short-term mutual funds

As every coin has two sides, there are certain risks associated with the short-term debt mutual funds. They are:

  • These are only short-term investments with a maximum maturity period of 3 yrs. Beyond that, they can’t withstand the inflation rate. 
  • Credit risk, a primary risk associated with debt instruments, is the risk of default on payment by the other party. In this case, you may lose your interest gains or the principal amount at maturity.
  • Any changes in the interest rates can affect the short-term debt funds on a minimal level. 

Short-term mutual funds taxation 

Short-term debt funds taxation is according to the income slab of the investor. The returns are added to the investor’s total income and taxed according to the tax slab the investor falls under.   

Best short-term mutual funds in 2022

There are several companies offering short-term mutual funds in India. We’ve listed the 10 best short-term mutual funds in 2022. 

Note: The information is dated 03 June 2022. The parameters used to filter the list of debt funds on Tickertape are:

  1. Category – Debt 
  2. Sub-Category – Short Duration Fund
  3. Plan – Growth
  4. Sorted by CAGR 3Y
S. No. FundsReturns in 1 yrCAGR 3 yrsCAGR 5 yrs
1ICICI Prudential Short-Term Fund3.60%7.50%7.51%
2Aditya Birla SL Short-Term Fund3.67%7.41%7.47%
3HDFC Short-Term Debt Fund3.08%7.23%7.31%
4Axis Short-Term Fund3.31%7.18%7.35%
5Nippon India Short-Term Debt Fund3.20%7.19%7.10%
6Kotak Bond Short-Term Fund2.96%6.94%7.18%
7Tata ST Bond Fund2.79%6.75%5.71%
8SBI Short-Term Debt Fund2.84%6.60%6.84%
9IDBI ST Bond10.68%8.28%6.85%
10Invesco India Short-Term Fund2.38%6.51%6.72%

1. ICICI Prudential Short Term Fund

It is a debt fund launched on 25 October 2001. It holds Assets Under Management (AUM) of Rs 16,622.61 cr. as of 30 April 2022. This fund has an expense ratio of 0.37% and the CAGR for 3-yr and 5-yr is 7.50% and 7.51%, respectively. 

2. Aditya Birla SL Short-Term Fund

It is a short-term mutual fund scheme from Aditya Birla Sun Life Mutual Fund launched on 10 May 2003. As of 31 March 2022, the company holds AUM of Rs 7,640 cr. The expense ratio on this fund is 0.40% and the CAGR for 3-yr and 5-yr is 7.41% and 7.47%, respectively. 

3. HDFC Short-Term Debt Fund 

This short-term debt fund from the HDFC Mutual Funds scheme was launched on 25 June 2010. They have Rs 14,204.41 cr. worth AUM, as of 31 March 2022. The expense ratio on this fund is 0.29%, the CAGR of 3-yr is 7.23% and 5-yr is 7.31%. 

4. Axis Short-Term Fund 

The short-term mutual fund scheme from Axis Mutual Fund was launched on 22 January 2010. The company holds AUM of Rs 10,085.99 cr. worth as of 30 April 2022. The expense ratio on this fund is 0.29% and the CAGR for 3-yr and 5-yr is 7.8% and 7.35%, respectively. 

5. Nippon India Short-Term Debt Fund 

It is one of the mutual funds schemes by Nippon India launched on 18 December 2002 and the company holds Rs 8,160 cr. as of 31 March 2022. The expense ratio on this fund is 0.35%. The CAGR for 3-yr is 7.19% and 5-yr is 7.10%. 

6. Kotak Bond Short-Term Fund 

It is a short duration bond from Kotak Mutual Funds launched on 02 May 2002. As of 31 March 2022, it holds AUM worth Rs 15,113 cr. The expense ratio on this fund is 0.34% and the CAGR for 3-yr is 6.94% and 5-yr is 7.18%. 

7. Tata ST Bond Fund 

This fund from Tata Mutual Funds was launched on 02 August 2002. As of 31 March 2022, the AUM of this fund is worth Rs 2,396 cr. and the expense ratio is 0.37%. The CAGR for this fund for 3-yr is 6.75% and 5-yr is 5.71%. 

8. SBI Short-Term Debt Fund 

It is the short duration mutual funds scheme from SBI Mutual Fund launched on 27 July 2007 and holds AUM worth Rs 13,963.45 cr. as of 31 March 2022. The expense ratio on this fund is 0.34% and the CAGR for 3-yr is 6.60% and 5-yr is 6.84%. 

9. IDBI ST Bond

This is a mutual funds scheme from IDBI Mutual Funds that was launched on 17 March 2011. It holds an AUM worth Rs 33 cr. as of 31 March 2022. The expense ratio on this fund is 0.28%. The CAGR for 3-yr is 8.28% and 5-yr is 6.85%. 

10. Invesco India Short-Term Fund

This short-term fund is from Invesco Mutual Funds which was launched on 24 March 2007. It holds AUM worth Rs 609 cr. as of 31 March 2022. The expense ratio on this fund is 0.35% while CAGR for 3-yr is 6.51% and 5-yr is 6.72%. 

What are the factors to consider while investing in a short-term mutual fund?

The three key parameters that you should evaluate before picking in on a short-term mutual fund are risk, return, and expense, as explained below:

Return

The first and foremost factor to consider is the return provided by a mutual fund. Hence, the best way to analyse short-term mutual funds is to review their performances over the past years. You can consider funds that demonstrate consistent performance and have generated higher returns than the benchmark.

Risk

You should study the portfolio details to determine the risk associated with a fund. If most of the corpus is invested in high-quality assets, it implies that the fund may have a relatively lower risk. On the contrary, if you are an investor with higher risk tolerance who seeks greater returns, you may choose a fund that focuses on high-risk investments as they tend to give high returns. However, this is not a guarantee. 

Expense ratio

There is an expense ratio levied on the investor for managing the fund. It is an annual maintenance charge that includes several components like management fees, maintenance fee, 12B-1 fee, brokerage fee, entry load and exit load. The investor must consider it at the time of analysis. 

How to find short-term mutual funds on Tickertape?

In case you want to find short-term mutual funds based on specific parameters such as the expense ratio, rolling returns, and other metrics, you can use Tickertape Mutual Fund Screener to get the results in no time. Read Introducing Mutual Fund Screener: Find the Right Fund for Your Financial Goals to understand how to use the Mutual Fund Screener. Once you shortlist the mutual funds from the screener results, you can head to the individual Mutual Fund Pages on Tickertape to further evaluate them.

Takeaway 

Investments are not just for long-term goals but also for the short-term. However, it is necessary to evaluate the risks and consider taking the advice of your financial planner before investing. 

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