Best Short Term Mutual Funds (2024) – A Comprehensive Guide

Last Updated on Jan 2, 2024 by Harshit Singh

When it comes to mutual funds, there are a number of different options available to investors looking for funds that will provide them with short term returns. In this article, let’s take a closer look at some of the best short term mutual funds available on the market, factors to consider before investing in them, advantages, how they work, taxation of short term mutual funds, and more. 

What are short term mutual funds?

Short term mutual funds are a type of Debt mutual fund with a limited maturity period. These funds invest in low-risk, high-quality securities, especially the ones with a proven record of repaying their loans on time and having enough cash flows from their business to justify the borrowings. The short term mutual funds are considered an alternative to a savings bank account and fixed deposits as their returns are slightly better and have high liquidity. 

Within short term mutual funds, there are a few types. For instance, if you are looking to invest for less than 91 days, you can opt for liquid funds. For a tenure of 3-6 months, you can opt for ultra short term bond funds. For 6-12 months, opt for low-duration funds, and for an investment horizon of 1-3 yrs, opt for short-duration funds.


Key features of short term mutual funds

Definition Low-risk, high-quality funds with a limited maturity period
Maturity tenure Duration varies for different funds from 91 days to 3 yrs
Risk On the lower side, due to the shorter maturity period of the underlying securities
Returns Higher in comparison with Fixed Deposits and a savings bank account
Liquidity High
Suitable for Risk-averse investors

Best short term mutual funds based on 5Y CAGR

Note: The data is from 2nd January 2024 and sorted using Tickertape Mutual Fund Screener using the following parameters:

  • Category > Debt > Short Duration Funds
  • 5yr CAGR – Sorted from highest to lowest

Short term mutual funds with highest AUM

Mutual Fund Name AUM Absolute Returns – 6M (%)
ICICI Pru Short Term Fund 18,806.99 3.86
Kotak Bond Short Term Fund 13,624.28 3.47
SBI Short Term Debt Fund 13,514.57 3.40
HDFC Short Term Debt Fund 12,301.64 3.52
Bandhan Bond Fund – Short Term Plan 9,260.66 3.49
Axis Short Term Fund 7,702.11 3.36
Nippon India Short Term Fund 6,123.36 3.49
Aditya Birla SL Short Term Fund 6,017.53 3.53
HSBC Short Duration Fund 3,379.77 3.41
DSP Short Term Fund 3,032.43 3.28

Note: The data is from 2nd January 2024 and sorted using Tickertape Mutual Fund Screener using the following parameters:

  • Category > Debt > Short Duration Funds
  • AUM – Sorted from highest to lowest


Short term mutual funds with minimum SIP

Mutual Fund Name AUM Minimum SIP (Rs.) Absolute Returns – 1Y (%)
Bandhan Bond Fund – Short Term Plan 9,260.66 100.00 7.46
Kotak Bond Short Term Fund 13,624.28 100.00 7.36
HDFC Short Term Debt Fund 12,301.64 100.00 7.62
JM Short Duration Fund 115.19 100.00 7.04
Tata ST Bond Fund 2,247.17 150.00 7.64
UTI Short Duration Fund 2,365.26 500.00 7.62
HSBC Short Duration Fund 3,379.77 500.00 7.16
Mirae Asset Short Duration Fund 349.04 1,000.00 7.23
SBI Short Term Debt Fund 13,514.57 1,000.00 7.30
Mahindra Manulife Short Duration Fund 44.73 1,500.00 7.68

Note: The data is from 2nd January 2024 and sorted using Tickertape Mutual Fund Screener using the following parameters:

  • Category > Debt > Short Duration Funds
  • Minimum SIP – Sorted from lowest to highest

Factors to consider before investing in the best short term mutual funds 

Though short term mutual funds look like a good investment option, you must consider the below-mentioned factors before investing in them.

Investment objective

Depending on your investment objective and plan, you must choose whether to invest in the best short term funds. Aligning your investment objective with the funds objective is important. Hence, define your goal, set a plan and then decide on investment instruments accordingly. 

Investment horizon

Each category of mutual funds caters to different investment horizons. Therefore, based on your goals and investment plan, look for funds that cater to your needs. If your goals are for three years or less, you can consider mutual funds for short term investment.

Expense ratio

One of the most important factors to consider in mutual funds is the expense ratio. It is the amount charged by the fund house for managing the fund. The Securities Exchange Board of India (SEBI) had capped the expense ratio for debt funds at 2.25%, which is lower as compared to equity funds. As the charges are lower, the returns for debt funds are comparatively higher. Hence, considering the expense ratio of every fund before investing is a wise choice. 

Diversification

Portfolio diversification is the key to earning good returns and avoiding risk. Therefore, diversify instruments in your portfolio that are best suited for your goals. You can break down your goals based on the time horizon and then choose the investment instruments accordingly.

Past performance of the fund

Past performance can be a good indicator in analysing the present and future returns of a fund. However, they do not guarantee accurate results. Hence, do not rely completely on past performance. It is worthwhile to take the help of a financial expert to get a detailed analysis of the fund and your suitability for the portfolio. 

Tax Implication

One of the important considerations when investing in short term mutual funds is the tax implication. The growth option of these funds is taxed as per the investor’s slab rate, which can significantly impact the returns from the investment.

Holding Analysis

One of the best ways to determine if the fund is aligning with your investment goal is to evaluate the fund’s holdings. Some funds may invest significantly in high-quality securities, meaning they offer stability and moderate returns. Other funds might be pivoted towards securities with a low credit rating, promising more sizeable returns. 

Risk Profile

The risk profile of a mutual fund is another important factor to consider before investing. For Debt funds, evaluate liquidity risk, credit risk, and interest rate risk. 

Advantages of short term mutual funds

  • They are ideal for passive investors. If you don’t need the money for at least 12 to 18 months, you can consider putting them in short term mutual funds.
  • Best funds for short term investment tend to deliver better returns than Fixed Deposits while keeping risk under control.
  • The short term mutual funds are more tax-efficient than Fixed Deposits and traditional savings accounts if held for three or more years.
  • Short-term mutual funds are highly liquid investments, meaning investors can easily buy or sell their units at any time without incurring any high costs or penalties.

How do short duration funds work?

Short-term mutual funds work by pooling money from multiple investors and investing it in a portfolio of short-term debt securities such as government securities, corporate bonds, and money market instruments.

The fund manager is responsible for selecting the best securities according to the fund objective. They also manage the fund portfolio to generate good returns while minimising risks. You can check the fund’s performance by looking at its Net Asset Value (NAV), which is calculated by subtracting the fund’s expenses from the value of the securities held in the portfolio. As an investor, you can buy and sell units of the mutual fund at its current NAV. 

Short-term mutual funds typically have a maturity period of 1 to 3 yrs, which means that the securities held in the portfolio mature within this timeframe. This makes short-term mutual funds less volatile than long-term mutual funds that invest in equities and a lower-risk investment option for investors seeking to park their funds for a short period of time.

Investors should carefully consider their investment goals and risk tolerance before investing in a short-term mutual fund. It’s important to review the fund’s investment objective, past performance, fees, and other factors before making an investment decision.

Who should invest in short term mutual funds?

  • Investors with an investment horizon of at least 1-yr or 1 to 3 yrs.
  • Passive investors or investors seeking regular income.
  • Investors looking for alternative short-term savings instruments than savings accounts and Fixed Deposits.
  • First-time investors in Debt funds
  • Risk-averse investors
  • Investors seeking high liquidity and tax efficiency

Taxation on short term mutual funds

You can earn dividend income and capital gains from short term mutual fund investments. Both of them are taxable. Dividend income is taxable as per the tax bracket you fall into. For capital gains, tax is applied based on short term capital gains and long term capital gains.

Short Term Capital Gains (STCG): The minimum holding period for this type of gain in Debt funds is less than 36 months. If you sell the fund unit before three years, STCG in debt mutual funds are taxed as per the applicable tax rate of the investor. Therefore, if your tax rate is 20%, then short term capital gains tax on debt funds is 20% + 4% cess.

Long Term Capital Gains (LTCG): For debt funds, the minimum holding period for LTCG is 36 months or longer. The long term gains for debt funds are taxed at 20% with cess and surcharges. 

For a better understanding of capital gain tax on debt mutual funds, refer to the below-mentioned table:

Points of comparison Short term capital gains Long term capital gains
Duration Shorter than 36 months 36 months or longer
Tax Taxed at the investor’s income tax slab rate 20% + cess + surcharge

How to choose the best short term mutual funds?

To get the best mutual funds for short term investment, Tickertape Mutual Fund Screener is your partner.

The first step when looking for the best funds for short term investment is defining the parameters you are going to use to get the list. Tickertape Mutual Fund Screener offers you over 50 filters to get the best mutual funds from 100s available in the market. You can filter the funds based on the payout structure – growth, dividend – IDCW (Income Distribution Capital Withdrawal), and bonus. Additionally, you can also filter funds based on the scheme info (AMC, lock-in period, exit load, fund manager, NAV, and SIP Investment), returns, risk, portfolio composition, and ratios.

Using all the filters, you can get the list of the best short term funds based on your preferred criteria. You can add those funds to your watchlist or, alternatively, create a Universe for short term funds. Moreover, you can export the data and analyse it separately. You can even create a custom filter. 

Additionally, you can perform individual analysis of the fund. This has all the important information you need about a mutual fund, like about the fund manager, its peers, portfolio, opinions and fund reviews. Here’s the asset page of ICICI Pru Short Term Fund

Begin your investment journey today by logging on to Tickertape. Research, analyse, invest, and review your portfolio from our platform without even requiring to switch tabs in between. Connect your portfolio and utilise our portfolio analysis tools to get a better understanding. Before investing, ensure you understand mutual funds and their types and then proceed to analyse the fundamentals of a fund. Not just that, but keep your investment goals and risk appetite in mind. Happy screening and investing!  

Conclusion

Short term mutual funds are low-risk, high-quality funds with a limited maturity period. They are best suited for risk-averse investors, passive investors, people seeking regular income and investors with an investment horizon of at least 1-yr or 1 to 3 yrs. To get the list of mutual funds best suited for you, use Tickertape Mutual Fund Screener. With over 50 filters, custom filters, the custom universe, individual analysis, and more, Tickertape makes your research, analysis, and investment journey easy. Sign up today!

FAQs

Can I invest in mutual funds for 6 months?

Yes, one can invest in mutual funds for six months. For this time horizon, you can consider ultra short term funds and liquid funds. 

Where do short term funds invest?

Short term mutual funds invest in a wide range of debt instruments such as corporate bonds, government securities, derivatives, bonds issued by financial institutions, and more. They also hold a part of their portfolio in money market instruments to maintain liquidity.

Which mutual fund is best for the short term?

As per the data of 2nd January 2024, the below-mentioned mutual funds are the best for the short term. They are listed on the basis of 3-yr Average Annual Rolling Returns (high to low) and are filtered among 100s of mutual funds using the Tickertape Mutual Fund Screener.

1. Bank of India Short Term Income Fund
2. Franklin India ST Income Plan
3. UTI ST Income Fund
4. ICICI Pru Short Term Fund
5. Aditya Birla SL Short Term Fund

Anjali Chourasiya
Latest posts by Anjali Chourasiya (see all)

Leave a Comment

Sign Up to Our Newsletter

Be the first to know the latest updates

Whoops, you're not connected to Mailchimp. You need to enter a valid Mailchimp API key.