Mutual funds have an array of investment options for short term and long term investors. These investments do not usually come with a minimum lock-in period (except ELSS) and enable the investor to reap the benefits of the market fluctuations, exit and enter the fund as per their convenience without paying a high cost of investment. This makes them ideal for all classes of investors.
Below are brief details of the mutual fund categories and the best funds to invest in if you are looking for an investment horizon of one year.
Meaning of short term funds
Short term funds are mutual funds that have a short maturity period usually between 1-3 years. The dominant assets of these funds are high quality assets of low risk that can help the investors generate higher returns. The maturity of the funds is dependent on the maturity of the underlying assets of the fund. These funds are open ended funds and hence, let the investors enter the market at any point in time. Many categories of funds can be included under the short term mutual fund umbrella. Such funds can be liquid funds, ultra-short term funds, low duration funds, etc.
Benefits of investing in short term funds
There are several benefits of investing in short term mutual funds. Some of such benefits are discussed below.
- These funds are not as volatile and not categorized as high risk funds due to the low or negligible risk of their underlying assets or instruments.
- These funds provide the best source of liquidity to investors in the case of emergencies
- Short term funds provide relatively good and stable returns in a short period
- Investors can get the benefit of diversification that is inherent to any mutual fund and can get exposure to various debt or money market instruments that would have otherwise been out of reach for the average investor.
Target investors
While most risk averse investors like to invest in quality mutual funds and hold them for a long period of time, such investors can consider an investment in short term funds as well. The risk involved in short term funds is usually low as the maturity of the underlying assets are fixed and they are low risk bearing instruments. Short term funds are a good option to park one’s funds for a limited duration of time and enjoy higher returns as compared to traditional investment options like savings accounts, fixed deposits, etc. The average returns generated by short term mutual funds were in the range of 3% to 6% approximately even in the past year when the markets were quite volatile. These returns when considered post tax can still be placed better as compared to the traditional investment options.
Taxation of short term funds
Short term mutual funds are categorized as debt mutual funds. The taxation of these mutual funds is therefore in line with the taxation of the debt mutual funds. The details of taxation for short term mutual funds are explained in the table below.
| Type of funds | Short term gains | Tax rate | Long term gains | Tax rate |
| Short term mutual funds | Less than 36 months | Slab rate of investor | 36 months and more | 20% (plus cess and surcharge) |
Apart from the capital gains, the dividend received from these funds is also taxable at the hands of the investor. Such dividend income is added to the gross total income of the investor and taxed at the applicable slab rate.
Category of funds
After considering the various details of the short term funds, let us now discuss a few categories of these funds and the top funds in each category.
- Ultra short funds
These funds are low risk funds having a maturity of 3 to 6 months. These funds are considered to be a bit higher risk as compared to liquid funds. These funds are mostly suited to institutional investors.
- HDFC Ultra S/T Fund
This fund was launched in 2018 and has been categorized as a fund with moderate risk. Some of the details of the fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Anil Bamboli |
| Launch date | 25th September 2018 |
| Minimum investment | Rs. 5,000 |
| Expense ratio | 0.64% |
| Risk | Moderate |
The returns provided by the fund as of 25th June 2021 are tabled below
| Period | 1 month | 3 months | 6 months | 1 yr | Since launch |
| Returns | 0.27% | 0.96% | 1.81% | 4.30% | 6.68% |
- IDFC Ultra Short Term Fund
This fund was launched in 2018 and aims at providing stable returns at relatively low risk. Some of the details of the fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Harsal Joshi |
| Launch date | 18th June 2018 |
| Minimum investment | Rs. 100 |
| Expense ratio | 0.42% |
| Risk | Low to Moderate |
The returns provided by the fund as of 25th June 2021 are tabled below
| Period | 1 month | 3 months | 6 months | 1 yr | Since launch |
| Returns | 0.26% | 0.87% | 1.62% | 3.50% | 6.44% |
- Low duration funds
Low duration funds are another type of debt funds that have a shorter maturity period. These funds come with a maturity period of 6 months to 12 months and the risk parameter of these funds is classified to be moderate. These funds invest predominantly in money market securities and debt instruments with similar maturity periods.
- Axis Treasury Advantage
This fund was launched in 2018 and has been categorized as a fund with low to moderate risk. Some of the details of the fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Aditya Pagaria |
| Launch date | 9th October 2009 |
| Minimum investment | Rs. 5,000 |
| Expense ratio | 0.61% |
| Risk | Low to Moderate |
The returns provided by the fund as of 25th June 2021 are tabled below
| Period | 1 month | 3 months | 6 months | 1 yr | Since launch |
| Returns | 0.25% | 1.11% | 1.88% | 4.78% | 7.85% |
- SBI Magnum Low Duration Fund
This fund was launched in 2007 and has been categorized as a fund with moderate risk. Some of the details of the fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Rajiv Radhakrishnan |
| Launch date | 27th July 2007 |
| Minimum investment | Rs. 5,000 |
| Expense ratio | 0.95% |
| Risk | Moderate |
The returns provided by the fund as of 25th June 2021 are tabled below
| Period | 1 month | 3 months | 6 months | 1 yr | Since launch |
| Returns | 0.28% | 0.96% | 1.56% | 4.05% | 7.60% |
- IDFC Low Duration Fund
This fund was launched in 2006 and has been categorized as a fund with low to moderate risk. Some of the details of the fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Rajiv Radhakrishnan |
| Launch date | 17th Jan 2006 |
| Minimum investment | Rs. 100 |
| Expense ratio | 0.51% |
| Risk | Low to Moderate |
The returns provided by the fund as of 25th June 2021 are tabled below
| Period | 1 month | 3 months | 6 months | 1 yr | Since launch |
| Returns | 0.22% | 1.05% | 1.76% | 4.22% | 7.49% |
These are debt funds with a shorter maturity of up to 1 year. These funds predominantly invest in money market instruments like Commercial Paper, Treasury Bills, Certificate of Deposit. These are ideal funds for investors with low risk tolerance and a shorter investment horizon.
- Kotak Money Market
This fund was launched in 2003 and has been categorized as a fund with moderate risk. Some of the details of the fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Deepak Agarwal |
| Launch date | 14th July 2003 |
| Minimum investment | Rs. 5,000 |
| Expense ratio | 0.33% |
| Risk | Moderate |
The returns provided by the fund as of 25th June 2021 are tabled below
| Period | 1 month | 3 months | 6 months | 1 yr | Since launch |
| Returns | 0.29% | 0.92% | 1.80% | 3.96% | 7.22% |
- ICICI Prudential Money Market Fund
This fund was launched in 2006 and has been categorized as a fund with moderate risk. Some of the details of the fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Nikhil Kabra |
| Launch date | 9th March 2006 |
| Minimum investment | Rs. 500 |
| Expense ratio | 0.33% |
| Risk | Moderate |
The returns provided by the fund as of 25th June 2021 are tabled below
| Period | 1 month | 3 months | 6 months | 1 yr | Since launch |
| Returns | 0.29% | 0.96% | 1.85% | 4.07% | 7.34% |
Conclusion
Short term mutual funds are a major investment opportunity for risk averse investors that do not wish to stay invested in the mutual fund market for a long investment horizon. These limited duration funds do have some inherent risks like liquidity risk, credit risk, or interest risk. However, these risks outweigh the returns generated by these funds over a short period of time. The majority of investors still have not explored this investment option to the best possible extent. This can be attributed to a lack of investor awareness. This scenario is gradually changing and these funds have been attracting more investors over the years.
FAQs
1. What are the limitations of short-term mutual funds?
A. There are several basic limitations of short-term mutual funds. These limitations are explained hereunder.
Credit risk – Credit risk is the risk associated with debt instruments when the issuer of the debt instrument defaults in the payment of the interest or the principal at the time of maturity.
Liquidity risk – Liquidity risk is the risk faced by short term debt funds when the fund manager is not able to sell or liquidate the underlying assets or instruments on a timely basis. Another liquidity risk is when the underlying debt instruments are sold at loss.
Interest risk – Another inherent risk of short term mutual funds is the risk of fluctuation of interest rate on account of various factors like geopolitical situations, the economic situation of the country, government policies, inflation, etc.
2. Is there any exemption on capital gains from short term mutual funds?
A. No. Short term mutual funds are taxable at the applicable slab rates of the investor without any benefit of tax exemptions or deductions.
3. What are the major underlying investments or assets of money market funds?
A. The major assets of money market funds are money market instruments like Commercial Paper, Treasury Bills, Certificate of Deposit.
4. What is the risk classification of short term mutual funds?
A. Short term mutual funds are classified as low to moderate risk mutual funds.
5. When is TDS deducted on dividend income received from mutual funds?
A. TDS is deducted at the rate of 10% on dividend income received in excess of Rs. 5,000 from mutual funds.
