Short Term Mutual Funds: Everything You Need to Know

Short Term Mutual Funds: Understanding the Basics

If you’re looking for an investment option that provides higher returns than traditional savings accounts, short term mutual funds could be a viable option. These funds invest in a mix of fixed income instruments, such as treasury bills, certificates of deposit, and commercial papers, with a maturity period ranging from a few months to a few years. Here’s a breakdown of everything you need to know about short term mutual funds.

What are Short Term Mutual Funds?

Short term mutual funds are a type of mutual fund that invests in fixed income securities that mature within a short period of time. These funds invest in a mix of debt instruments such as treasury bills, certificates of deposit, commercial papers, and corporate bonds. Short term mutual funds are generally considered low-risk investments as they have a lower duration and, therefore, lower interest rate risk compared to long term mutual funds.

Types of Short Term Mutual Funds

There are several types of short term mutual funds, including:

Liquid Funds: These funds invest in short term debt securities that have a maturity period of up to 91 days. Liquid funds are a popular option for investors who want to park their surplus cash for a short duration.

Ultra Short Term Funds: These funds invest in a mix of debt instruments with a maturity period ranging from 3 months to a year. Ultra short term funds provide higher returns than liquid funds, but they also come with slightly higher risk.

Low Duration Funds: These funds invest in debt securities with a maturity period of up to three years. Low duration funds are suitable for investors who are willing to take on slightly more risk in exchange for higher returns.

Benefits of Short Term Mutual Funds

Here are some of the key benefits of short term mutual funds:

Liquidity: Short term mutual funds are highly liquid, meaning that investors can withdraw their funds quickly and easily without any penalty.

Low Risk: Short term mutual funds are considered low-risk investments as they have a lower duration and, therefore, lower interest rate risk compared to long term mutual funds.

Higher Returns: Short term mutual funds provide higher returns than traditional savings accounts, making them an attractive investment option for investors looking to earn higher returns on their surplus cash.

Risks of Short Term Mutual Funds

While short term mutual funds are considered low-risk investments, there are some risks that investors should be aware of:

Credit Risk: Short term mutual funds are exposed to credit risk, which refers to the risk of default by the issuer of the debt instrument.

Interest Rate Risk: Short term mutual funds are also exposed to interest rate risk, which refers to the risk of a change in interest rates affecting the value of the debt instrument.

Market Risk: Short term mutual funds are exposed to market risk, which refers to the risk of fluctuations in the market affecting the value of the fund.

Conclusion

Short term mutual funds are a great investment option for investors who want to earn higher returns than traditional savings accounts without taking on too much risk. With their lower duration and diversified portfolio, short term mutual funds can provide a stable source of income in the short term. However, it’s important to remember that no investment is completely risk-free, and investors should carefully consider their investment goals and risk appetite before investing in short term mutual funds.

Frequently Asked Questions (FAQs)

Q.What are short term mutual funds?

Short term mutual funds are mutual funds that invest in a mix of fixed income instruments with a maturity period ranging from a few months to a few years. These funds are generally considered low-risk investments as they have a lower duration and lower interest rate risk compared to long term mutual funds.

Q.What types of short term mutual funds are available?

There are several types of short term mutual funds, including liquid funds, ultra short term funds, and low duration funds. Liquid funds invest in short term debt securities that have a maturity period of up to 91 days, while ultra short term funds invest in a mix of debt instruments with a maturity period ranging from 3 months to a year. Low duration funds invest in debt securities with a maturity period of up to three years.

Q.What are the benefits of short term mutual funds?

Short term mutual funds offer several benefits, including liquidity, low risk, and higher returns than traditional savings accounts. They are also easy to invest in and offer a diversified portfolio of fixed income instruments.

Q.What are the risks associated with short term mutual funds?

Short term mutual funds are exposed to credit risk, interest rate risk, and market risk. Credit risk refers to the risk of default by the issuer of the debt instrument, while interest rate risk refers to the risk of a change in interest rates affecting the value of the debt instrument. Market risk refers to the risk of fluctuations in the market affecting the value of the fund.

Q.How do I invest in short term mutual funds?

Investing in short term mutual funds is easy. You can open an account with a mutual fund company or invest through a broker or financial advisor. You will need to complete the necessary paperwork and provide your personal and financial information.

Q.Can I withdraw my investment in short term mutual funds at any time?

Yes, short term mutual funds are highly liquid, meaning that investors can withdraw their funds quickly and easily without any penalty. However, it is important to note that mutual funds have a minimum investment holding period, which can vary depending on the fund.

Q.What is the minimum investment required to invest in short term mutual funds?

The minimum investment required to invest in short term mutual funds can vary depending on the fund and the mutual fund company. Some funds may have a minimum investment requirement of as little as Rs. 1,000, while others may require a larger minimum investment.

Q.Are short term mutual funds suitable for long term investments?

Short term mutual funds are designed for short term investments, and are not suitable for long term investments. If you are looking to invest for the long term, you may want to consider other investment options such as equity mutual funds or index funds.

Q.Are short term mutual funds tax-free?

No, short term mutual funds are not tax-free. Short term capital gains from mutual funds are taxed as per your income tax slab rate, while long term capital gains are taxed at a lower rate of 20% after indexation.

Q.How do I choose the right short term mutual fund for me?

Choosing the right short term mutual fund depends on your investment goals, risk appetite, and investment horizon. You should consider factors such as the fund’s performance, expense ratio, minimum investment amount, and the fund manager’s experience and track record before making an investment decision. It is also important to read the fund’s prospectus and consult with a financial advisor before investing.