Imagine this: you’ve got some extra cash sitting in your bank account, and you’ve set your sights on a short-term goal. Maybe it’s funding a spontaneous trip to the mountains, upgrading your tech game with the latest gadgets, or creating a safety net for life’s unexpected moments.
But letting that money snooze in savings account? That’s playing it way too safe, especially when smarter options are right within reach.
This is where short-term mutual funds come into play. A savvy balance between growth and liquidity.
So, if you’re ready to step-up your investment games and make those short-term goals a reality, let’s explore how these funds can work wonders for you!
What are Short Term Funds?
Short-term funds are mutual funds designed for those looking to invest for a short duration, typically ranging from a few months to 3 years.
These funds primarily focus on debt instruments like treasury bills, corporate bonds, and commercial papers with shorter maturities. Their primary aim is to provide stability, steady returns, and lower risk compared to long-term investments. By prioritizing capital preservation and liquidity, they cater to investors seeking predictable outcomes over a brief period.
Who are the Short Term Funds Ideal For?
These funds are ideally designed for:
- Investors with a low risk appetite.
- Investors aiming for better returns than the local saving accounts without long-term commitments.
- Investors with short term financial goals, like buying gadgets, upgrading furniture, planning a vacation or securing an emergency fund.
- Investors seeking decent returns with minimal exposure to market volatility.
Brief History of Short Term Mutual Funds in India
The history of short-term mutual funds in India is that of transformation molded by the changing needs of investors. Decades ago, these funds became a feasible solution for investors who wanted to have more flexibility and not be subjected to a long lock-in of funds.
The evolution of the financial landscape that garnered shape in the 1990s and the regulations. This allowed the funds to become innovative in what they offer, introduced short-term investment avenues created with investors in mind who wanted to gain the benefits of equity, but with added security, and accessibility through short-term measures.
Short-term mutual funds come with their own unique value: They adapt according to life’s uncertainties. They offer a safe haven for those not very daring: Either it be setting aside capital for uncertain futures, or providing almost failing returns for later engagements, they remain an option for shy investors. They have become a reliable financial implement that indicates even short-range maneuvers can have long-range paybacks in a well-designed portfolio.
Types of Short Term Mutual Funds
Here’s a table summarizing the different types of short-term mutual funds in India:
| Type of Fund | Investment Horizon | Key Features | Example Instruments |
| Short-Duration Funds | 1-3 years | Moderate risk and returns; invests in short-term debt instruments. | Treasury bills, corporate bonds, commercial papers |
| Liquid Funds | Up to 91 days | High liquidity; minimal risk; suitable for parking surplus cash. | Treasury bills, certificates of deposit, call money |
| Ultra-Short-Duration Funds | 3-6 months | Slightly higher risk and returns than liquid funds. | Commercial papers, certificates of deposit, short-term bonds |
| Money Market Funds | Up to 1 year | Moderate liquidity and returns; invests in money market instruments. | Treasury bills, commercial papers, interbank call money |
| Low-Duration Funds | 6-12 months | Slightly higher risk and returns compared to ultra-short funds. | Short-term corporate bonds, commercial papers |
| Floater Funds | Varies | Primarily invest in floating-rate instruments; less sensitive to interest rates. | Floating-rate bonds, money market instruments |
| Arbitrage Funds | Short-term | Low-risk hybrid option using equity-derivative arbitrage; some debt exposure. | Derivative contracts, short-term corporate bonds |
| Banking & PSU Debt Funds | 1-3 years | High credit quality; low risk; focuses on PSU and bank-issued debt. | Bonds from banks, PSUs, and government-backed entities |
| Corporate Bond Funds | 1-3 years | Invests in high-rated corporate bonds; offers relatively higher returns. | Corporate bonds, debentures |
| Dynamic Bond Funds | Varies | Actively managed portfolio; adjusts duration based on interest rate movements. | Government securities, corporate bonds, money market instruments |
| Gilt Funds (Short Duration) | 1-3 years | Invests in government securities; high credit quality, sensitive to interest rates. | Treasury bills, short-term government bonds |
| Fixed Maturity Plans (FMPs) | Fixed (varies) | Closed-end funds; predictable returns if held to maturity; limited liquidity. | Certificates of deposit, commercial papers, bonds |
Real-Life Examples of Short-Term Fund Uses
Example 1: Saving for a Wedding: If you have a wedding coming up in the next 12 months, you might invest in liquid funds or short-duration funds to preserve capital while earning a return.
Example 2: Building an Emergency Fund: Short-term funds, especially liquid and money market funds, can be an excellent choice for parking emergency funds as they offer safety and easy liquidity.
Example 3: Planning a Trip to Andaman & Nicobar: Planning a relaxing getaway to Andaman and Nicobar islands? By investing in short-term funds, you can grow your savings while ensuring that your funds remain easily accessible when it’s time to book your trip!
Let’s see how the numbers add up:
| Scenario | SIP Amount (Monthly) | Expected Return Rate | Investment Horizon | Total Investment(INR) | Investment Value | Profit |
| Saving for a Wedding | ₹25,000 | 12% | 2 Years | ₹12,00,000 | ₹15,45,198 | ₹3,45,198 |
| Building an Emergency Fund | ₹10,000 | 12% | 1 Year | ₹1,20,000 | ₹1,28,107 | ₹8,107 |
| Trip to Andaman & Nicobar Islands | ₹12,000 | 12% | 1 Year | ₹1,43,988 | ₹1,53,716 | ₹9,728 |
Note: The data has been gathered by using a SIP calculator. However, it is important to mention that the returns can be subjected to change based on changing market conditions.
Top Short Term Mutual Funds
Here’s a tabular summary of the top mutual funds for your reference:
| Fund Name | Category | Expense Ratio | 1 Year Returns | 3 Year Returns | 5 Year Returns | AUM (INR) |
| Bank of India Short Term Income Fund | Debt – Short Duration Fund | 1.00% | 9.10% | 13.59% | 8.37% | 82 Cr |
| HDFC Short Term Debt Fund | Debt – Short Duration Fund | 0.71% | 8.31% | 6.28% | 6.71% | 14,976 Cr |
| Axis Short Duration Fund | Debt – Short Duration Fund | 0.89% | 8.03% | 6.12% | 6.37% | 9,329 Cr |
| Nippon India Short Term Fund | Debt – Short Duration Fund | 0.94% | 8.02% | 5.96% | 6.33% | 7,627 Cr |
| Aditya Birla Sun Life Short Term Fund | Debt – Short Duration Fund | 1.01% | 7.96% | 6.28% | 6.72% | 9,091 Cr |
Data as of 26.12.24
Impact on Short-Term Mutual Funds Post-2024 Budget Changes
Taxation on Returns
- Higher Tax Burden: All the gains on debt mutual funds are now taxed in the investor’s income tax slab rate, which goes up to 30% for those with higher income, leading to an increase in total tax liability.
- No more long-term tax benefits. With indexation gone, there is no tax relief for holding the funds for more than 36 months.
Changes in Investment Strategy
- Alternative Investments: Investors may consider fixed deposits, bonds, or equity-oriented funds for better post-tax returns.
- Short-Term Focus: With no long-term tax advantages, short-term mutual funds will likely be used for short-term goals rather than long-term holdings.
Impact on Returns
- Lower Post-Tax Returns: The higher tax burden can significantly reduce returns for investors in higher tax brackets.
Portfolio Diversification
- Rethinking allocation: Investors might reduce the allocations they are making to short-term mutual funds and seek alternative investment options that would offer greater tax efficiency.
Check out this video to get a synopsis of what happened:
10 Risk Considerations for Short Term Mutual Funds
While short-term mutual funds are generally safer than stocks, they still come with some risks.
Here’s what you need to know:
- Interest Rate Risk
- What it is: When interest rates go up, the value of bonds in the funds can drop.
- Impact: Rising rates can lower the fund’s value, but short-term funds are less affected than long-term ones.
- How to Reduce It: Short-term funds are naturally less sensitive to rate changes.
- Credit Risk
- What it is: The chance that the company issuing the bond might fail to pay interest or repay the loan.
- Impact: Risky bonds can offer higher returns but can also result in losses if the issuer defaults.
- How to Reduce it: Choose funds investing in high-quality bonds or government-backed instruments.
- Liquidity Risk
- What it is: The difficulty in selling investments quickly without losing value.
- Impact: In rare cases, it could cause delays or force selling at a loss.
- How to Reduce it: Go for liquid funds that are easy to buy and sell.
- Reinvestment Risk
- What it is: The risk that reinvested earnings (like interest) might earn less if rates drop.
- Impact: This can lower your overall returns if interest rates fall.
- How to Reduce it: Diversifying investments can reduce the risk.
- Inflation Risk
- What it is: The chance that inflation will lower the value of your returns.
- Impact: High inflation means your returns might not buy as much as you expected.
- How to Reduce it: Pair short-term funds with other investments to hedge against inflation.
- Regulatory and Tax Risk
- What it is: Changes in government regulations or taxes that could impact your investment.
- Impact: Changes like the removal of indexation in the 2024 budget can increase taxes on returns.
- How to Reduce it: Stay updated on regulations and talk to advisors about tax-efficient strategies.
- Concentration Risk
- What it is: When too much of the fund is invested in one sector or company.
- Impact: A major issue with one issuer can hurt the whole fund.
- How to Reduce it: Diversify your investments across different assets.
- Market and Economic Risk
- What it is: Economic events like recessions or inflation affecting the fund’s performance.
- Impact: A downturn can harm corporate bonds, lowering returns.
- How to Reduce it: Invest in funds with stable government securities or top-rated corporate bonds during uncertain times.
- Fund Manager Risk
- What it is: The risk that poor decisions from the fund manager affect your returns.
- Impact: Bad security picks or bad timing can hurt returns.
- How to Reduce it: Choose funds with experienced managers who have a solid track record.
- Exit Load Risk
- What it is: Some funds charge a fee if you pull out your investments too soon.
- Impact: This fee can eat into your returns if you redeem early.
- How to Reduce it: Check if the fund has an exit load and when it applies before investing.
Bottom Line
Alright, let’s wrap this up. Short-term mutual funds are all about making your money work for you in a smart, efficient way. Whether you’re aiming to fund a dream vacation, build a cushion for emergencies, or just want to get more out of your savings without locking your cash away for years, these funds offer that perfect blend of growth and flexibility. They’re safer than the rollercoaster ride of stock markets, offer better returns than a savings account, and can be accessed easily via the best SIP platforms.
But of course, no investment is ever 100% risk-free, right? From interest rate changes to tax shifts and even the risk of liquidity, there are some things to consider. Still, if you’re smart about your choices and stay informed, short-term funds can help you achieve those quick financial goals without the hassle.
At the end of the day, it’s all about finding that sweet spot between risk and reward that works for your specific goals and financial personality. Just remember, these funds can deliver solid results as long as you keep your eyes open, choose wisely, and factor in potential tax impacts.
So, whether you’re saving for that next big purchase or just growing your savings on the side, short-term mutual funds could be the boost you need to get ahead.
Suggested Read – Top 5 Retirement Mutual Funds for 2025
