Best Short Term Mutual Funds In India: Should You Invest?

Mutual funds

Short term mutual funds invest in debt instruments with a maturity period ranging from 1 to 3 years. You can invest in debt instruments such as commercial papers, treasury bills, certificates of deposits, etc. These are ideal for conservative investors but may provide better returns than Fixed Deposits. Short duration funds are riskier than ultra short term funds, low duration funds, and liquid funds. However, they have a lower risk compared to long-term funds and medium-duration funds. 

Read on to get a list of short term funds, factors to consider while investing, and know if you should invest in this type of fund.

Top 10 Short Term Mutual Funds in India

As a short term investor, you can choose to invest in the following mutual funds:

If you wish to lower your risk exposure, you can consider investing in the Navi Ultra Short Term Fund. It will help you earn slightly better returns than what you get from a savings account. Visit Navi Mutual Fund to start your investment today.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

Who Should Invest in Short Term Mutual Funds?

Short term fund investment is ideal for the following:

• Investors who have an investment horizon of at least 1 year

These funds are recommended for investors who want to stay invested for at least 1 year. In fact, an investment horizon of 1 to 3 years would be ideal for earning better returns. 

• First-time debt fund investors

Investors willing to invest in debt funds for the first time can consider investing in short term mutual funds. These funds carry low risk and can offer higher returns than a savings account. Moreover, short-term funds’ returns are usually on the higher side than overnight or liquid funds.

• Investors wanting regular income

Short duration funds carry low risk; they have the potential to provide stable returns. So, short term investors can invest in these mutual fund schemes to fulfil their financial goals. 

• Investors seeking alternate short term savings 

Short term funds feature more earning potential than bank deposits as they earn capital gains as well as interest income. Thus, during an interest rate hike, these funds benefit significantly from high short term spreads. 

Also Read: 10 Best Mutual Funds To Invest In India with High Return [2022]

Factors to Consider before Investing in Short Term Funds

Irrespective of your investment horizon, you must ensure to consider the following factors before investing in short term funds:

• Expense Ratio

The expense ratio is a fee that an AMC charges to cover a scheme’s operating expenses, which include administrative fees, fund manager’s fees, etc. As per SEBI, AMCs cannot charge more than 2.00% of the fund’s AUM as the expense ratio. Remember to compare the expense ratio of different funds before investing.

• Fund’s Past Returns

Another essential factor to consider before investing in short term funds is a scheme’s past returns. This indicates how the fund has been performing throughout the years so that you can make an informed investment decision. However, note that the fund’s past performance does not influence its future potential. 

• Investment Objective

Before investing, you must identify the financial goals that you would like to fulfil through this investment. Your objective can be long term or short term. Only after identifying your investment objective should you invest in a mutual fund scheme.

• Risk Tolerance

As a matter of fact, some mutual fund schemes feature high risk while others might be less risky. If you want to take risks, you can consider investing in equity funds. On the other hand, if you are a risk-averse individual, a short term fund could be an ideal choice.

• Fund Manager’s Track Record

You should check the experience and qualifications of a fund manager before investing. You need to know if the fund managers have the potential to deliver the expected results.

Also Read: What Is The Minimum Investment Amount For Mutual Funds?

Final Word

Short term mutual funds are a suitable option for conservative investors looking for stable returns. That said, before allocating your savings to any scheme, make sure to assess your own risk appetite and identify your investment goals. 

FAQs on Short Term Mutual Funds

1. In which instruments do short duration funds invest in?

Short term funds invest in both very short term and short term debt instruments. The portfolio constituents of these funds include bonds, commercial paper, treasury bills, certificate of deposits, and more. Investors might want to check the portfolio constituents of a fund before investing. 

2. Can I invest in a mutual fund for 3 months?

Yes, for a short investment duration of 3 to 6 months, you can choose to invest in liquid funds or ultra short term mutual funds. Liquid mutual funds invest in debt instruments like certificate of deposits, government bonds, etc., for a duration of around 3 months.

3. How risky are short term mutual funds?

Short duration funds generally invest in companies featuring a proven track record of loan repayment. Their lending duration is not long; you might witness some volatility on a really short term basis. But, it can yield better returns for an investment period of at least 1 to 2 years.

4. Why is an interest rate hike bad for mutual funds?

A hike in the interest rates is always bad news for mutual funds. This is because as the interest rate increases, the NAV (net asset value) of debt funds decreases. This happens due to an inverse relationship between price and interest rate.

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.