BAJAJ BROKING
March 15, 2024
4 mins read
Short-term mutual funds in India are designed for investors seeking stable returns with a moderate risk profile over a 1-3 year horizon. These funds primarily invest in high-quality debt instruments such as government securities, corporate bonds, and money market instruments, balancing risk and return efficiently. Examples of short-term mutual funds include HDFC Short Term Debt Fund, ICICI Prudential Short Term Fund, SBI Short Term Debt Fund, Nippon India Short Term Fund, and Aditya Birla Sun Life Short Term Fund. Investors prefer these funds for their potential to generate better returns than fixed deposits while managing interest rate risks effectively.
A short-term mutual fund is a type of debt mutual fund that primarily invests in fixed-income securities with short to medium durations, typically ranging from one to three years. These funds are designed for investors seeking stable returns with lower risk compared to equity funds while maintaining higher liquidity than long-term debt funds.
Short-term mutual funds invest in instruments such as government securities, corporate bonds, treasury bills, and other money market instruments. They are particularly suitable for individuals who want to park surplus funds for a short duration while earning better returns than traditional savings accounts or fixed deposits.
Short-term mutual funds aim to reduce interest rate risk by holding securities with shorter maturities. These funds are often considered by conservative investors looking for predictable income with minimal volatility. Investors may consider factors such as credit quality, expense ratio, and interest rate trends before making investment decisions.
Short-term mutual funds are ideal for investors seeking stable returns with moderate risk over a short to medium investment horizon. These funds are structured for investors seeking liquidity and capital stability, with the potential for returns that may be higher than traditional fixed deposits. Their investment strategy focuses on fixed-income securities with maturities between one to three years, making them suitable for those who do not want to expose their portfolio to long-term interest rate fluctuations.
Short Term Mutual Funds Basis Annualized Returns of 1, 3 & 5 Years
Below is a table showcasing the annualized returns of short-term mutual funds over 1-year, 3-year, and 5-year periods.
Scheme Name | 1-Year Return (%) | 3-Year Return (%) | 5-Year Return (%) |
Invesco India Short Duration Fund - Direct Plan - Growth | 7.78 | 6.25 | 7.22 |
Bank of India Short Term Income Fund - Direct Plan - Growth | 9.60 | 14.30 | 8.79 |
UTI Short Duration Fund - Direct Plan - Growth | 8.08 | 6.95 | 7.86 |
ICICI Prudential Short Term Fund - Direct Plan - Growth | 8.48 | 7.54 | 7.43 |
Aditya Birla Sun Life Short Term Fund - Direct Plan - Growth | 8.49 | 7.17 | 7.40 |
Nippon India Short Term Fund - Direct Plan - Growth | 8.53 | 6.82 | 6.98 |
HDFC Short Term Debt Fund - Direct Plan - Growth | 8.40 | 6.87 | 6.96 |
Axis Short Duration Fund - Direct Plan - Growth | 8.47 | 6.91 | 6.92 |
Kotak Bond Short Term Plan - Direct Plan - Growth | 8.43 | 6.69 | 6.75 |
Sundaram Short Duration Fund - Direct Plan - Growth | 8.43 | 6.81 | 6.65 |
Tata Short Term Bond Fund - Direct Plan - Growth | 8.17 | 6.67 | 6.58 |
Mirae Asset Short Duration Fund - Direct Plan - Growth | 8.47 | 6.71 | 6.48 |
Bandhan Bond Fund - Short Term - Direct Plan - Growth | 8.40 | 6.46 | 6.44 |
SBI Short Term Debt Fund - Direct Plan - Growth | 8.26 | 6.61 | 6.44 |
Annualized returns are sourced from latest available data on Moneycontrol as of February 13, 2025.
Investors may assess key factors to determine if short-term mutual funds align with their financial objectives and risk tolerance. These funds primarily invest in debt instruments with a tenure of one to three years, but certain aspects must be carefully analyzed for optimal returns.
Short-duration funds belong to the debt mutual fund category, investing in fixed-income securities with a portfolio duration of one to three years, in line with SEBI guidelines. These funds aim to provide investors with stable returns while managing interest rate risk effectively. Duration is a key factor in understanding how these funds operate. Duration refers to the sensitivity of a bond’s price to changes in interest rates—shorter-duration funds are less volatile compared to medium or long-duration funds, making them a safer option for conservative investors.
Short-duration funds allocate investments across corporate bonds, government securities, treasury bills, commercial papers, and money market instruments. The fund managers actively adjust the portfolio’s duration based on market conditions. Fund managers may increase exposure to longer-term securities when anticipating falling interest rates to enhance capital gains. In contrast, during rising interest rates, they may focus on shorter-term bonds to limit losses.
These funds derive returns through interest earned from debt securities and potential capital gains resulting from bond price appreciation. Short-duration funds generally yield higher returns than liquid or ultra-short-term funds but come with relatively higher risk exposure. These funds are best suited for investors with a 1-3 year investment horizon looking for a balance between returns and stability.
Short-duration funds are classified as debt mutual funds and are subject to specific tax implications based on the holding period of the investment. Investors earn returns through interest income and capital gains, both of which are taxed differently.
Since the financial year 2020-21, dividend income from short-duration funds is taxed based on the investor's relevant income tax bracket. Previously, dividends were subject to Dividend Distribution Tax (DDT), but the responsibility for tax payment now lies with the investor.
The taxation of capital gains is determined by the holding period of fund units before redemption. Profits from units redeemed within three years are categorized as Short-Term Capital Gains (STCG) and taxed as per the investor's relevant income tax bracket. However, if units are held for more than three years, the gains are considered Long-Term Capital Gains (LTCG) and subject to a 20% tax rate with indexation benefits, which account for inflation adjustments before calculating the taxable amount.
Capital Gains Type | Holding Period | Tax Rate |
Short-Term Capital Gains (STCG) | Less than 3 years | Rate based on investor’s IT slab |
Long-Term Capital Gains (LTCG) | More than 3 years | 20% with indexation benefits |
When selecting short-duration funds, investors should evaluate their investment horizon and tax implications to optimize post-tax returns.
Short-term mutual funds provide a structured investment avenue for those seeking stability and moderate risk over a 1-3 year period. By allocating assets to government securities, corporate bonds, and treasury bills, these funds offer liquidity and capital preservation benefits. Short-term mutual funds may provide higher post-tax returns than fixed deposits while offering flexible withdrawal options.
Before investing, individuals should assess their financial goals, risk tolerance, and tax considerations.
Although less risky than equity and long-duration debt funds, short-term mutual funds are not entirely risk-free. By focusing on fixed-income securities maturing within one to three years, these funds carry moderate exposure to interest rate and credit risks. While they may outperform savings accounts and fixed deposits, their market value can fluctuate based on economic conditions.
Disclaimer:
Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only.
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Ultra-short funds cater to investors with an investment horizon ranging from one month to 18 months. They are structured for short-term financial goals and typically provide more stability than long-duration debt funds. They suit investors looking for short-term, lower-risk investment avenues.
One benefit of ultra-short funds is that most of them lack a lock-in period, allowing investors to withdraw funds anytime. However, some funds may impose an exit load if redeemed within a specific timeframe. It is advisable to review fund-specific terms before investing to confirm withdrawal flexibility.
No, ultra-short funds guarantee no assured returns. Their returns depend on market conditions, interest rate movements, and the credit quality of securities in the portfolio. While they are relatively stable, they are still subject to fluctuations and risks.
Ultra-short term funds carry more risk than fixed deposits (FDs) because they are market-linked. While they offer higher return potential, they are subject to interest rate and credit risks, unlike FDs, which provide guaranteed returns.
The majority of ultra-short-duration mutual funds impose no exit load whatsoever, though certain funds may levy charges if redeemed within a specific period. Investors should carefully examine the fund's terms and conditions to determine any applicable exit load policies before making a withdrawal.
The investment horizon for short duration mutual funds typically ranges from 1 to 3 years. These funds are structured to invest in debt securities within this timeframe, with returns influenced by interest rate movements and market conditions.
Short duration mutual funds invest in debt securities such as corporate bonds, government securities, treasury bills, commercial paper, and securitized debt instruments. They also allocate a portion to money market assets to maintain liquidity and stability.
Short duration mutual funds carry moderate risk. While they are safer than long-duration debt funds, they are still exposed to credit risk, interest rate fluctuations, and market volatility, which can impact returns. Risk levels depend on fund composition and market conditions.
Returns from short duration mutual funds depend on interest rates and market conditions. They usually offer higher returns than savings accounts and fixed deposits but are subject to fluctuations. Past performance does not guarantee future results.
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