Short-term debt funds refer to mutual funds that are suitable for low-risk investors with low to moderate horizon of one to three years. Stable returns and modest risk accompany these funds.

These funds can be compared to fixed deposits due to similar characteristics.

A short-term debt fund provides tax benefits if held for over three years. This makes them beneficial over traditional fixed deposits.

Short-term debt funds do not attract penalty on their redemption before the maturity unless the redemption is before the predetermined period. On the other hand, FDs despite being high on liquidity, attract a penalty of up to 1% if redeemed before its maturity date.

Different Debt Funds to Invest In
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
Axis Short Term Fund - Direct - Growth 8.55% 7.78% 8.52% 0.28% NA Debt
(Short Duration)
Moderately Low
Indiabulls Short Term Fund - Direct - Growth 10.17% 8.52% 9.32% 0.48% NA Debt
(Short Duration)
Low
Baroda Pioneer Short Term Bond Fund - Direct - Growth 9.46% 8.91% 9.17% 0.71% NA Debt
(Short Duration)
Moderately Low
DHFL Pramerica Short Maturity Fund - Direct - Growth -6.3% 3.07% 5.74% 0.46% NA Debt
(Short Duration)
Moderate
Sundaram Short Term Debt Fund - Direct - Growth 0.49% 5.16% 6.83% 0.26% NA Debt
(Short Duration)
Moderately Low
Franklin India STIP - Direct - Growth 10.21% 9.7% 9.68% 0.76% NA Debt
(Short Duration)
Moderate
HDFC Short Term Debt Fund - Direct - Growth 9.07% 7.82% 8.4% 0.25% NA Debt
(Short Duration)
Moderately Low

1. Axis Short Term Fund

Objective

The fund seeks to provide stable returns with a low-risk strategy while maintaining the liquidity of the portfolio. The fund invests in debt and money-market instruments.

Risk Moderately Low
Min SIP Amount ₹1000
Expense Ratio 0.28%
NAV ₹21.3 (03 May 2019)
Fund Started 1-Jan-13
Fund Size ₹4,383 Cr

Why Invest in This Fund?

  • Risk-adjusted returns are higher compared to the category
  • Lower expense ratio
  • Exit load is zero

2. Indiabulls Short Term Fund

Objective

The fund seeks to generate income and capital appreciation by investing in a wide range of debt and money market instruments. The maturity is in line with the maturity of the respective plans under the scheme.

Risk Low
Min SIP Amount ₹500
Expense Ratio 0.50%
NAV ₹1662.0 (03 May 2019)
Fund Started 13-Sep-13
Fund Size ₹175 Cr

Why Invest in This Fund?

  • Risk-adjusted returns are higher compared to the category
  • 3Y Returns are higher than the benchmark
  • Exit load is zero

3. Baroda Pioneer Short Term Bond Fund

Objective

The fund seeks to generate income from a portfolio constituted of short term debt and money market securities.

Risk Moderately Low
Min SIP Amount ₹500
Expense Ratio 0.74%
NAV ₹20.7 (03 May 2019)
Fund Started 9-Jan-13
Fund Size ₹267 Cr

Why Invest in This Fund?

  • Risk-adjusted returns are higher compared to the category
  • Outperformed the benchmark during the three years and five years period

4. DHFL Pramerica Short Maturity Fund

Objective

The fund aims to provide steady returns with low volatility by investing in short-medium term debt and money market securities.

Risk Moderate
Min SIP Amount ₹500
Expense Ratio 0.49%
NAV ₹35.1 (03 May 2019)
Fund Started 2-Jan-13
Fund Size ₹392 Cr

Why Invest in This Fund?

  • Higher risk-adjusted returns when compared to the category.

5. Sundaram Short Term Debt Fund

Objective

The fund seeks to provide regular income by investing primarily in fixed income securities that may be paid out as a dividend or reinvested depending on the interest of the investor.

A secondary objective is to keep the value of its units reasonably stable.

Risk Moderately Low
Min SIP Amount ₹250
Expense Ratio 0.28%
NAV ₹33.6 (03 May 2019)
Fund Started 8-Jan-13
Fund Size ₹657 Cr

Why Invest in This Fund?

  • Higher risk-adjusted returns when compared to the category
  • Lower expense ratio
  • Outperformed the benchmark during the three years and five years period
  • Zero exit load

6. Franklin India STIP

Objective

The fund seeks to offer stable returns by investing in short-term fixed income instruments.

Risk Moderate
Min SIP Amount ₹500
Expense Ratio 0.78%
NAV ₹4187.6 (03 May 2019)
Fund Started 1-Jan-13
Fund Size ₹12,517 Cr

Why Invest in This Fund?

  • Higher risk-adjusted returns when compared to the category
  • Outperformed the benchmark during the three years and five years period

7. HDFC Short Term Debt Fund

Objective

To provide regular income by investing in debt/money market instruments and government securities with maturities of less than 30 months.

Risk Moderately Low
Min SIP Amount ₹500
Expense Ratio 0.25%
NAV ₹20.9 (03 May 2019)
Fund Started 1-Jan-13
Fund Size ₹7,316 Cr

Why Invest in This Fund?

  • Higher risk-adjusted returns when compared to the category
  • Lower expense ratio
  • Outperformed the benchmark during the three years and five years period
  • Zero exit load

Methodology Employed

The following parameters have been used to identify the funds –

  • High rolling returns
  • Consistency in performance
  • Low downside risk
  • Asset base

Benefits of Short-Term Debt Funds

Following are the benefits of investing in short-term debt funds –

1. Stable Returns

Debt funds are classified as – liquid funds, floating rate funds, corporate bond funds, ultra-short term funds, etc. This classification is done based on the holding period of the investment instruments in these funds.

The investment instruments include government securities, treasury bills, corporate bonds, money market instruments, etc.

These instruments usually offer a fixed rate of return and come with a pre-determined maturity date etc. Given these instruments are not directly and severely impacted by the capital market, they provide stable returns.

2. Helps to Maintain a Balance in the Portfolio

Debt funds perform an integral role in the asset allocation strategy. They score over equity funds given they moderate the risk and helps in balancing the risk of the portfolio.

3. Helps to Meet Short-Term Goals

The short-term debt funds help achieve short-term goals owing stability in returns. These funds impart excellent immunity from interest rate movements arising due to the lower average maturity period.

Risks in Short-Term Debt Funds

It goes on without saying that short-term debt funds carry low risk when compared to equity counterparts, but again these funds are not devoid of risks completely. Following are the possible risks of short-term debt funds –

1. Credit Risk

Short-term debt funds comprise of fixed income instruments.

These instruments come with a credit rating that provides a sense on the credit risk associated with these instruments. The credit rating on fixed income instruments is awarded by independent agencies such as CRISIL Ltd, CARE Ratings Ltd, etc.

These ratings indicate the risk and quality of the portfolio. For example, a high rating is given when the risk of default is low.

2. Interest Rate Risk

The prevailing interest rate determines the return on short-term debt funds.

The rising interest rate has a negative bearing on the performance, as it cuts down the gain. A lower interest rate has an opposite impact on the profit.

Thus, the fluctuation in interest rate has an impact on the prices of mutual funds and hence the value.

3. Risk Due to Low Maturity Period

An investor should check the average maturity value of the portfolio.

This helps an investor gauge the interest rate risk in conjunction with maturity value. The lesser is the time for the fund to reach its maturity; the lower will be the impact of the change in the interest rate.

6 Types of Risks Associated with Mutual Funds

4. Inflation Risk

Inflation could impact short-term debt funds negatively.

This could lead to a steep rise in the interest rate thereby bringing down the value of debt fund. Thus, high inflation value may adversely impact the debt funds.

5. Liquidity Risk

The flexibility to subscribe and exit a debt fund varies. An investor should opt for the funds that allow a high degree of flexibility that suits your needs.

Taxation on debt funds

Profits realized within three years of investment are considered as short-term capital gains tax. In such a scenario, the gain will be deemed to be a part of your income while filing income tax.

Profit realized after three years is considered as long-term capital gains tax. This profit is taxable at 20% with indexation.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww