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Best Short-Term Mutual Funds in 2021

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Learn about India’s best short-term mutual funds and where to invest to earn good returns over a short-term investment horizon. We have covered the following in this article:

This article includes [hide]

  1. What is Short-Term Mutual Funds?
  2. Top 10 Short-Term Mutual Funds
  3. Who Should Invest Short Term Mutual Funds?
  4. Taxability of Short-Term Mutual Funds
  5. Risks Possessed by Short-Term Funds
  6. What is the Return Potential of Best Short-Term Mutual funds?
  7. Advantages of Short-Term Funds

What is Short-Term Mutual Funds?

Short-Term Mutual funds are open-ended funds having a maturity period ranging from 15 days to 91 days. The maturity period of these funds varies depending on the maturity period of the underlying instruments. These funds invest predominantly in high-quality assets that are of low risk. This fund is an excellent investment option for risk-averse investors. If you are looking for options to park your surplus funds (for less than a month), then liquid funds are a great option. If you have a longer investment horizon (two to four months), then you can invest in ultra-short-term funds.

Top 10 Short-Term Mutual Funds

The table below shows the top-performing short-term mutual funds based on the last 3-year and 5-year returns:

Mutual fund 5 Yr. Returns 3 Yr. Returns Min. Investment Rating

Who Should Invest Short Term Mutual Funds?

Short-term mutual funds are suitable for those investors having an investment horizon of shorter than three months. These funds are a better option than a regular savings bank to park your surplus funds. Short-term funds are capable of providing much higher returns than bank deposits and provide much-needed liquidity.

Risk-averse investors may consider investing in these funds since the risk carried by these funds is on the lower side due to the shorter maturity period of the underlying securities. These funds have historically provided returns in the range of 6-8%.

Taxability of Short-Term Mutual Funds

As per the amendments of the Budget 2020, dividends offered by all mutual funds are added to your overall income and taxed as per the income tax slab you fall under. Before the Budget 2020, dividends were made tax-free in the hands of investors as the fund houses paid dividend distribution tax (DDT) before they paid out dividends to the investors.

The rate of taxation of capital gains of these funds follows the rules of taxation of debt funds. Short-term capital gains (realised on selling your debt fund units within a holding period of three years) are added to your overall income and taxed as per your income tax slab. Long-term capital gains (realised on selling your debt fund units after a holding period of three years) are taxed at a rate of 20% after indexation.

Risks Possessed by Short-Term Funds

Since short-term funds are a class of debt funds, they nearly carry the same risks that any other debt funds carry. Short-term funds come attached with the following risks:

  1. Liquidity Risk

    2. Liquidity risk is the possibility of the fund manager being unable to sell the underlying instruments without resulting in a significant loss.

  2. Credit Risk

    3. This is the possibility of the issuers of the underlying securities notwithstanding by their word of paying regular interest and principal at the time of maturity.

  3. Interest Rate Risk

    4. This is the probability of the interest offered by the issuers of the underlying securities fluctuating due to the various economic and geopolitical factors.

What is the Return Potential of Best Short-Term Mutual funds?

Some short-term mutual funds in India offer comparatively higher returns on investment as against bank deposits. The return rate could range between 8-9%, again, based on the assets in the fund portfolio. Considering the tax benefits, the return on these investments tends to be higher than the post-tax returns from other forms of investments.

Advantages of Short-Term Funds

The following are the most significant advantages of investing in short-term funds:

  • These funds are an excellent short-term investment option.
  • Short-term funds have the potential to provide much higher returns than a regular savings bank account.
  • The risk possessed by these funds is on the lower side as the underlying securities mature over a short period.
  • The investors of these funds get exposure to a diversified portfolio constituted by various debt and money market securities.