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Best Short Term Debt Funds To Invest In 2021-22

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Mr Mehta wants to invest in mutual funds to cover his child’s education. Being a risk-averse individual, he is looking for options that will provide him appreciable returns over a short period without incurring substantial financial losses. 

In such a scenario, Mr Mehta can choose from the best short term debt funds available in India. These funds invest in debt securities and money market instruments such that the portfolio’s Macaulay duration is anywhere between 1 and 3 years. Such mutual fund schemes involve low financial risk and can generate stable returns. 

If your investment objective is similar to that of Mr Mehta, you might want to go through the following segment and streamline your options. 

Best Short Term Debt Funds to Invest in India

Best Short Term Debt FundsFeatures
IDFC Bond Fund Short Term PlanAssets Under Management (AUM): Rs.12,708.19 Crore as on 30 September 2021
5-year returns: 7.78% as on 31 October 2021
Net Asset Value (NAV): Rs. 48.2349 as on 3 November 2021
Expense ratio: 0.29%
Nippon India Short Term FundAssets Under Management (AUM): Rs. 10,552.76 Crore as on 30 September 2021
5-year returns: 7.13% as on 30 September 2021
Net Asset Value (NAV): Rs. 44.5865 as on 30 September 2021
Expense ratio: 0.33%
ICICI Prudential Short Term FundAssets Under Management (AUM): Rs. 21344.92 Crore as on 30 September 20215-year returns: 8.28% as on 29 October 2021Net Asset Value (NAV): Rs.50.347 as on 29 October 2021Expense ratio: 0.37%
Mirae Asset Short Term FundAssets Under Management (AUM): Rs. 675.34 Crore as on 30 September 2021
3-year returns: 7.61% as on 30 September 2021
Net Asset Value (NAV): Rs. 13.0641 as on 30 September 2021
Expense ratio: 0.33%
Aditya Birla Sun Life Short Term FundAssets Under Management (AUM): Rs. 8226.53 Crore as on 30 September 2021
5-year returns: 7.25% as on 2 November 2021
Net Asset Value (NAV): Rs. 39.7965 as on 3 November 2021
Expense ratio: 0.41%
HDFC Short Term Debt Fund Assets Under Management (AUM): Rs.19,435.54 Crore as on 30 September 2021
5-year returns: 8.14% as on 30 September 2021
Net Asset Value (NAV): Rs.25.7862 as on 30 September 2021
Expense ratio: 0.24%
Kotak Bond Short Term FundAssets Under Management (AUM): Rs.17,160.49 Crore as on 29 October 2021
5-year returns: 7.98% as on 29 October 2021
Net Asset Value (NAV): Rs.45.02 as on 29 October 2021
Expense ratio: 0.34%
L&T Short Term Bond FundAssets Under Management (AUM): Rs.4,526.38 Crore as on 30 September 2021
5-year returns: 7.66% as on 30 September 2021
Net Asset Value (NAV): Rs.22.2353 as on 30 September 2021
Expense ratio: 0.27%
SBI Short Term Debt FundAssets Under Management (AUM): Rs.20,767.01 Crore as on 30 September 2021
5-year returns: 7.69% as on 30 September 2021
Net Asset Value (NAV): Rs.26.7714 as on 30 September 2021
Expense ratio: 0.34%
DSP Short Term FundAssets Under Management (AUM): Rs.3,309.91 Crore as on 30 September 2021
5-year returns: 7.45% as on 29 October 2021
Net Asset Value (NAV): Rs.39.91 as on 29 October 2021
Expense ratio: 0.3%
Invesco India Short Term FundsAssets Under Management (AUM): Rs.1,306.81 Crore as on 30 September 2021
5-year returns: 6.63% as on 30 September 2021
Net Asset Value (NAV): Rs.3,110.2790 as on 30 September 2021
Expense ratio: 0.35%

Looking for more funds? Download the Navi app in minutes and explore a wide range of funds, including Nifty 50 Index Fund. Invest with Navi and enjoy the benefits of low-expense ratio.  

Who Should Invest in Short Term Debt Funds?

  • Conservative investors with a short term investment horizon might find this option desirable. 
  • Investors who want to obtain higher returns than bank fixed deposits may consider investing in short term debt funds.
  • As these funds have the potential to generate stable returns, an investor seeking regular income might consider this an appropriate investment tool. 

If you don’t believe this type of debt fund to be a suitable option, you might want to consider investing in other debt instruments such as Ultra Short Term Funds. In this regard, you might consider reputed asset management companies, such as Navi. 

Taxation on Short Term Debt Funds

The taxation on short term debt funds depends on the holding period of units. Refer to the table below to know more.

Capital  GainsTaxation
Short term capital gains (STCG)Short Term Capital Gains are obtained when you sell your short-duration fund units within 3 years from the date of purchase. Such gains are taxed as per your income tax slab rate. 
Long term capital gains (LTCG)Investors earn long term capital gains if they redeem their fund units after a holding period of 3 years. Currently, these gains are taxed at the rate of 20% post indexation.

Benefits of Short Duration Funds

Stable returns

Short term debt funds are less risky in comparison to equity funds. They have the potential to offer stable returns, which provides stability to an investment portfolio. 

Liquidity

This category of debt mutual funds offers high liquidity. Investors can redeem their units within two working days after placing a redemption request with the asset management company. Such funds do not come with a lock-in period. 

Moderate risk

The financial risk associated with investments in short duration funds is low. This is because the portfolio of such funds comprises financial instruments having a short maturity period in comparison to long or medium duration funds. That said, the level of risk varies from one fund to another depending upon the rating of the bonds that primarily constitute the portfolio. 

Invest in market instruments

By allocating funds to short term debt funds, investors can invest in debt securities, including money market instruments, which they might not be able to purchase directly. 

Risks of Investing in Short Term Debt Funds

Short duration funds are subject to the following risks:

Interest risk

Bond prices are inversely proportional to the interest rates. Therefore, the bond prices fall when the interest rates rise. On the other hand, when the interest rate goes down, bond prices go up. Nevertheless, note that the interest rate risk is moderate because these funds are invested for a short duration of 1 to 3 years. 

Credit risk

Credit risk arises when borrowers fail to repay the principal or interest amount on time. Credit rating agencies, such as ICRA and CRISIL, assess the repayment capabilities of companies and grade their debt instruments accordingly. In case the securities are downgraded, bond prices decrease. This, in turn, has a negative impact on the net asset of the fund, leading to losses. 

Final Word

Although there are some risks associated with investments in short term debt funds, you might still consider this investment vehicle to meet your financial goals owing to its ability to generate stable returns at minimal risks. 

Frequently Asked Questions

What are the factors to consider before investing in short term debt funds?

You might want to consider the following pointers before investing in short duration funds:

  • Expense ratio
  • Investment duration
  • Risk appetite
  • Experience of the fund manager
  • Credit quality

Do short duration funds come with a lock-in period?

No, short term debt funds do not have a lock-in period.

What is Yield to Maturity in short term debt funds?

It is the estimated total returns from a fixed income security investment when the assets are held till their maturity.

What types of securities constitute the portfolio of short term debt funds?

Generally, a short term debt fund invests in debt instruments such as corporate bonds, commercial papers, non-convertible debentures, government securities, certificates of deposits etc.

Do short duration funds provide tax benefits under Section 80C of the Income Tax Act, 1961?

No, there are no tax benefits under this section for investments in short term debt funds.

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