What mutual funds are suitable for short term investments?

Short term investments typically refer to those with a tenure of less than 3 years. Avenues that are suitable for such investments usually require relative stability of capital invested.

Many individuals consider only traditional avenues such as Fixed Deposits (FDs), recurring deposits or savings accounts for such investments. However, some mutual fund categories too can be suitable investment options for short term, offering same or better return potential than traditional avenues, along with high liquidity and flexibility. This article tells you more about such short term mutual fund options and factors to consider before investing.

• Table of contents

1. What is a short term mutual fund investment plan?
2. How do short term investments work?
3. What are the types of short term investment options available in India?
4. Benefits of investing in short term investment plans
5. Who should invest in short duration investment plans?
6. 3 things to consider before investing in short-term mutual funds

What is a short term mutual fund investment plan?

Debt funds are usually more suitable than equity investments for short duration investment plans. Debt mutual funds aim to provide a higher return potential than savings accounts, while maintaining relatively low/low-to-moderate/moderate risk. However, debt mutual fund returns are subject to market risk, however, returns in saving accounts are fixed. Most debt funds also offer high liquidity, allowing investors to buy or sell units as per their requirements. Investment options for short term could include money market funds, low duration fund, among others.

How do short term investments work?

When you go for a short duration investment plan through a mutual fund, your money is combined with that of other investors in the fund and invested in short-term debt instruments like treasury bills, commercial papers, bonds, etc.  The focus is on keeping the risk low and maintaining stable return potential.

What are the types of short term investment options available in India?

If you are looking to make short term investments in mutual funds, some of the options currently available are:

• Liquid funds: These are a type of debt mutual fund that invests in low-risk money market instruments such as treasury bills, commercial papers, and certificates of deposit for a duration of less than 3 months. They fall in the low or low-to-moderate risk category and typically offer high liquidity, making it a suitable short term mutual funds option.
• Short-term debt mutual funds: Money is invested in debt securities such as corporate bonds, government bonds, and other fixed-income instruments with a maturity of 1 to 3 years. They fall in the low to moderate risk and high liquidity category. Debt mutual funds that invest in debt securities with a maturity of less than 1 year fall into the ultra-short mutual funds.
• Money market funds: These funds invest in short-term debt instruments like commercial papers, certificates of deposit, and government treasury bills with a duration of less than one year. This short term investment is designed to offer relative stability and high liquidity.

Capital gains from all debt-oriented short term investment plans are classified as Short Term Capital Gains irrespective of the holding period and taxed at the applicable tax rate.

Benefits of investing in short term investment plans

• Higher liquidity: Short duration investment plans allow easy access to funds which makes them better suitable for investors with short-term goals or urgent cash requirements.
• Higher return potential: When compared with traditional savings accounts, debt mutual funds typically offer a higher return potential. However, savings account usually guarantee capital safety and fixed returns, while mutual fund investments are subject to market risk.
• Relative stability of capital: Short term investment plans aim to provide a stable return potential and prioritise preservation of capital.

Who should invest in short duration investment plans?

You should invest in short term investment plans if:

• You are a conservative investor.
• You are looking for an investment plan that offers more flexibility and liquidity than fixed deposits and other traditional avenues.
• You want higher return potential than savings accounts and traditional bank deposits.

3 things to consider before investing in short-term mutual funds

• Investment horizon and risk tolerance: It is crucial to ensure that the investment matches your financial goals. Choose low-risk options if you seek relative stability of capital.
• Liquidity needs: Consider how easily you can access funds in case of an emergency or urgent requirement before investing in a short term investment plan.
• Tax implications: Understand tax treatment on returns as these funds are treated like debt funds for taxation purposes.

In conclusion, short term investment plans in mutual funds typically offer a balance of liquidity with a moderate return potential at a relatively low risk level. This makes them suitable for investors with near-term financial goals who may want fast access to their money in times of emergency. By selecting a suitable plan based on risk tolerance, investment horizon, and liquidity needs, investors can potentially grow their funds while mitigating risk.

FAQs:

What is the lock-in tenure of debt funds?

Most open-ended debt funds generally do not have a lock-in period, offering high liquidity. However, certain schemes may have lock-in tenures.

What is the tenure of short term investment plans?

The tenure of short duration investment plans in India typically ranges from 1 to 3 years. They are designed for investors with a near-term financial goal and a low risk appetite.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.