Short-term mutual funds are those that have an investment duration of fewer than 3 years. These are also known as liquid funds and are ideal for short-term investments. They allow investors to park their money in a ready-to-use form, rather than investing in other instruments which might lock their money up for longer periods of time.
These funds are suitable for investors who have a low-risk tolerance and do not want to invest in equity or debt funds. The returns of such schemes are relatively lower than long-term funds but still offer good returns in comparison to other instruments.
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There are many factors to consider before investing in short-term mutual funds in India. The following are some of the most important factors-
Before you start investing, it is important to know your investment goal. If you plan to invest for a short period of time, then short-term mutual funds are the best option for you.
It is also important to understand your risk profile before investing in any financial product. A good way to determine this is by taking a risk assessment test online or speaking with an investment advisor about it. You should only invest in products that align with your risk profile.
Diversification is another key consideration when deciding on how to invest money in India. You can diversify by choosing different types of mutual funds or even different types of stocks within the same sector (e.g., tech stocks). This will help lower your overall risk level while still allowing you to take advantage of potential gains in certain sectors.
The tax treatment associated with short-term mutual fund investments varies based on how long they have been held before selling them off (or when they expire). If these funds are held for less than three years, then investors must pay capital gains tax.
Short-term mutual funds have a lower risk profile than other types of funds because they invest in low-risk bonds and other securities that are easily liquidated. The average annual return for a short-term fund is between 4% and 6%. However, this can vary significantly depending on where you invest your money and which company you choose as your provider.
The expense ratio is basically how much it costs for each dollar invested in the fund for management fees and operating expenses like accounting staff salaries or rent etc. The lower the expense ratio, the better off you’ll be when it comes time to withdraw your money later on down the road.
Entry And Exit Loads are fees you pay when you buy or sell shares in a mutual fund; they’re usually only charged when you buy or sell shares through a broker instead of directly from the fund itself. These fees can range from 0% – to 3%, so make sure that you know what these fees are before investing in any funds with them included.
Are there any taxes that come out of your account? Some funds have tax-free accounts where taxes won’t be taken out of your investment earnings until it’s time for you to withdraw the money from the fund (which may be decades later).
Launched in 2013, this 5 stars rated fund has provided great returns to investors. It has also consistently beaten its benchmark. With a reasonable amount of SIP at INR 500 and an expense ratio of 0.77%, investors can look to invest in this scheme for a time horizon of one year.
Edelweiss Banking and PSU Debt Fund is a diversified fund that invests in debt securities of banking, financial services and public sector undertakings (PSUs). The fund invests primarily in fixed maturity plans, liquid funds, and money market instruments.
The fund aims to generate returns through a combination of interest income from debt securities and capital appreciation from equity exposure. The fund has a low correlation with equity markets. It also provides high liquidity through easy redemption options.
Nippon India Short Term Fund-Growth is a close-ended debt scheme. The objective of the Fund is to generate capital appreciation and income by investing in corporate debentures, bank fixed deposits, and money market instruments. The investment span available for this scheme is 9 months to 15 months with an option to exit after 6 months through a folio consolidation process to earn higher dividends.
The fund invests in Government Securities, Corporate Bonds, Commercial Papers, and Money Market Instruments. The key objective of this scheme is to provide investors with current income. The investment direction of this scheme is portfolio management and liquidity preference shall be a secondary but not least important factor.
The IDFC Bond Fund – Short Term Plan Regular Plan-Growth Option is an open-ended, short debt fund. It invests in a portfolio of eligible fixed income securities, including domestic corporate bonds and debentures, bank bills, and other money market instruments. The scheme aims to generate optimal returns over the short term.
The ICICI Prudential Short Term Fund – Direct Plan-Growth is an open-ended short duration debt scheme that aims to generate returns with a short-term debt portfolio and provides capital appreciation through investments in equity and hybrid securities. The underlying debt portfolio consists of low-duration bonds and money market instruments. It is benchmarked against NIFTY Short Duration Debt Index B-II.
If you have a lump sum amount of money that you need to invest because there are no immediate requirements for it, but still want to earn a profit from it by getting decent returns, then investing in short-term mutual funds is a very good option.
This option works great for investors who don’t have time to follow the market and would rather remain invested in mutual funds regularly.
Disclaimer: The views expressed in this post are that of the author and not those of Groww.
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Research Analyst - Bavadharini KS