Last Updated on Jul 30, 2024 by Anjali Chourasiya
Investments come in all shapes and sizes, regardless of the misconceptions that only long-term benefits exist. Short-term goals are meant to be achieved in 3 yrs. There are certain options available, particularly designed to fulfil the purpose of short-term investment goals. Therefore, you can consider investing in instruments like short-term mutual funds rather than leaving your money idle in the bank account.
Let us look at the best short-term mutual funds, their benefits and risks.
Table of Contents
What are short-term mutual funds?
Mutual funds are one of the famous investment options wherein a fund manager pools funds of several individuals in the market and invest them in various asset classes. Short-term mutual funds are one such scheme that comes with a short maturity period of not more than 3 yrs. These are also referred to as short-term debt funds or income funds.
As the name suggests, short-term debt funds invest in companies for a short period of 1 – 3 yrs. The fund manager picks companies with a good track record in terms of debt clearance and good cash flow.
Short-term mutual funds predominantly include low-credit risk instruments. Thus, this category of mutual funds is an excellent investment destination for risk-averse investors who seek stable, short-term returns. However, it is important to go through each and every detail of an investment before investing in one.
Best short-term mutual funds in 2024
Based on the 3-yr CAGR
| Name | AUM (Rs. in cr.) | CAGR 3Y (%) | Expense Ratio (%) |
| Bank of India Short Term Income Fund | 72.26 | 12.46 | 0.98 |
| IDBI ST Bond | 26.27 | 9.53 | 0.28 |
| Franklin India ST Income Plan | 429.00 | 8.59 | 0.04 |
| UTI ST Income Fund | 2,301.96 | 8.06 | 0.33 |
| Aditya Birla SL Short Term Fund | 5,045.21 | 7.68 | 0.38 |
| ICICI Pru Short Term Fund | 14,797.18 | 7.28 | 0.4 |
| HDFC Short Term Debt Fund | 11,490.97 | 6.70 | 0.29 |
| Nippon India Short Term Fund | 5,376.09 | 6.59 | 0.34 |
| Axis Short Term Fund | 7,096.45 | 6.51 | 0.3 |
| Kotak Bond Short Term Fund | 12,203.28 | 6.13 | 0.36 |
Note: The data is from 2nd May 2023 and filtered using Tickertape Mutual Fund Screener. The following parameters are used to get the best short-term mutual funds based on the expense ratio.
- Category > Debt Funds > Short-Duration Funds
- 3-yr CAGR – Sort from highest to lowest
3-yr Compound Annual Growth Rate (CAGR) is a metric used to measure an investment’s average annual growth rate over a three-year period. It calculates the rate at which an investment would have grown if it had grown at a steady rate each year. 3-yr CAGR can provide a more meaningful and accurate representation of investment performance over a longer period than shorter-term measures.
Based on the Tracking Error
| Name | AUM (Rs. in cr.) | CAGR 3Y (%) | Expense Ratio (%) | Tracking Error (%) |
| Nippon India Short Term Fund | 5,376.09 | 6.59 | 0.34 | 0.42 |
| HDFC Short Term Debt Fund | 11,490.97 | 6.70 | 0.29 | 0.46 |
| Baroda BNP Paribas Short Duration Fund | 235.12 | 5.89 | 0.37 | 0.47 |
| JM Short Duration Fund | 120.28 | 0.00 | 0.32 | 0.47 |
| Mahindra Manulife Short Duration Fund | 43.14 | 0.00 | 0.29 | 0.47 |
| Canara Rob Short Duration Fund | 508.69 | 5.53 | 0.47 | 0.49 |
| IDBI ST Bond | 26.27 | 9.53 | 0.28 | 0.50 |
| Mirae Asset Short Term Fund | 373.63 | 5.70 | 0.32 | 0.52 |
| DSP Short Term Fund | 2,821.74 | 5.70 | 0.30 | 0.53 |
| LIC MF ST Debt Fund | 101.43 | 5.23 | 0.37 | 0.57 |
| Indiabulls Short Term Fund | 7.27 | 4.83 | 0.38 | 0.59 |
Note: The data is from 2nd May 2023 and filtered using Tickertape Mutual Fund Screener. The following parameters are used to get the best short-term mutual funds based on the expense ratio.
- Category > Debt Funds > Short-Duration Funds
- Tracking error – Sort from lowest to highest
Tracking error is the difference in performance between a fund and its benchmark and is calculated as the annualised standard deviation of returns. Ideally, the tracking error should be zero, but management costs and other factors lead to non-zero tracking errors.
The benchmark for debt funds is typically a bond index that reflects the performance of a specific segment of the debt market, such as government bonds or corporate bonds. The tracking error for a debt fund represents the annualised standard deviation of the difference between the returns of the fund and the returns of its benchmark index.
Debt funds aim to deliver returns aligned with their benchmark index while minimising the tracking error. A higher tracking error indicates that the fund’s returns have diverged more from its benchmark index, while a lower tracking error indicates that the fund’s returns have closely followed its benchmark index.
Based on the Sharpe ratio
| Name | AUM (Rs. in cr.) | CAGR 3Y (%) | Expense Ratio (%) | Sharpe Ratio (%) |
| JM Short Duration Fund | 120.28 | 0.00 | 0.32 | 3.55 |
| ICICI Pru Short Term Fund | 14,797.18 | 7.28 | 0.40 | 2.63 |
| Aditya Birla SL Short Term Fund | 5,045.21 | 7.68 | 0.38 | 2.29 |
| UTI ST Income Fund | 2,301.96 | 8.06 | 0.33 | 2.10 |
| Axis Short Term Fund | 7,096.45 | 6.51 | 0.30 | 2.08 |
| Sundaram Short Duration Fund | 200.11 | 6.05 | 0.28 | 1.94 |
| Mirae Asset Short Term Fund | 373.63 | 5.70 | 0.32 | 1.87 |
| HDFC Short Term Debt Fund | 11,490.97 | 6.70 | 0.29 | 1.81 |
| PGIM India Short Duration Fund | 27.99 | 5.74 | 0.23 | 1.77 |
| SBI Short Term Debt Fund | 12,094.16 | 5.74 | 0.34 | 1.76 |
Note: The data is from 2nd May 2023 and filtered using Tickertape Mutual Fund Screener. The following parameters are used to get the best short-term mutual funds based on the expense ratio.
- Category > Debt Funds > Short-Duration Funds
- Sharpe ratio – Sort from highest to lowest
Sharpe Ratio helps understand excess return earned on a stock over its benchmark for one unit of risk. It uses 104 weekly close points to calculate. To understand Sharpe Ratio, knowing a benchmark is important – a standard to measure a security’s performance. For instance, IndusInd Bank’s performance can be compared with Nifty Bank and auto stocks with Nifty Auto.
If Investor P buys 100 shares of XYZ at Rs. 40/share on 1st Jan 2023 and sells them for Rs. 47/share on 1st Jan 2024, their 1-year return is 17.5%, with a 22% risk. During the same period, the benchmark rose by 7% with a 10% risk. The Sharpe Ratio is (17.5% – 7%) / (22% – 10%) = 1.05, indicating that the investor earned 1.05% excess return over the benchmark for every 1% of the risk.
Sharpe Ratio can be used to compare risk-adjusted returns of different stocks, with the higher ratio indicating a better stock, all else being equal.
Based on the Expense ratio
| Name | AUM (Rs. in cr.) | CAGR 3Y (%) | Expense Ratio (%) | Sharpe Ratio (%) |
| Franklin India ST Income Plan | 429.00 | 8.59 | 0.04 | 1.07 |
| PGIM India Short Duration Fund | 27.99 | 5.74 | 0.23 | 1.77 |
| TRUSTMF Short Term Fund | 94.72 | 0.00 | 0.23 | 1.52 |
| HSBC Short Duration Fund | 3,609.36 | 5.34 | 0.27 | 1.02 |
| Sundaram Short Duration Fund | 200.11 | 6.05 | 0.28 | 1.94 |
| IDBI ST Bond | 26.27 | 9.53 | 0.28 | 1.07 |
| HDFC Short Term Debt Fund | 11,490.97 | 6.70 | 0.29 | 1.81 |
| Mahindra Manulife Short Duration Fund | 43.14 | 0.00 | 0.29 | 1.54 |
| Bandhan Bond Fund – Short Term Plan | 9,273.20 | 5.83 | 0.30 | 0.88 |
| DSP Short Term Fund | 2,821.74 | 5.70 | 0.30 | 1.36 |
Note: The data is from 2nd May 2023 and filtered using Tickertape Mutual Fund Screener. The following parameters are used to get the best short-term mutual funds based on the expense ratio.
- Category > Debt Funds > Short-Duration Funds
- Expense ratio – Sort from lowest to highest
An expense ratio shows a fund’s operating expenses as a percentage of its assets. It’s calculated by dividing expenses by the average value of assets under management. Similarly, a mutual fund’s total expense ratio is a percentage of its average Net Asset Value (NAV), which covers expenses like sales, administration, investment management, and auditing. Expenses reduce the fund’s assets, thereby reducing the return to investors.Â
Taxation on Short-Term Mutual Funds as per the 2024 Budget
Understanding the latest tax regulations on debt mutual funds is crucial for effectively managing your investments. The Union Budget 2024 has introduced significant changes to the taxation of debt mutual funds. Here is a detailed breakdown of the new tax rules:
Short-Term Capital Gains (STCG)
If you sell your debt fund units within three years (36 months), the gains from these investments are considered short-term capital gains. According to the new budget, these gains will be taxed according to your income tax slab rate.
Long-Term Capital Gains (LTCG)
For debt funds held for over three years (36 months), the gains are categorized as long-term capital gains. The key points to note under the new budget are:
- Tax Rate: The tax rate for long-term capital gains on debt funds is now a flat 12.5%, regardless of the amount of gain.
- No Indexation Benefit: The benefit of indexation, which previously allowed investors to adjust the purchase price of their assets for inflation, has been removed for debt funds. This means that the entire gain from selling a debt fund after three years will be taxable at the flat rate of 12.5%.
Summary
| Capital Gains Tax | Description |
| Short-Term Capital Gains (STCG) | If you sell your debt fund units within three years (36 months), the tax will be as per your income tax slab. |
| Long-Term Capital Gains (LTCG) | For debt funds held for over three years (36 months), the tax rate is now a flat 12.5% without indexation benefits. |
Benefits of short-term mutual funds
- Investors can expect stable returns as the impact of interest rate changes is less on short-term debt funds.
- With no lock-in period, investors can exit the short-term debt funds whenever they want.
- The taxes levied on returns from the short-term debt funds are less when compared to the profits earned on the fixed deposits.
- The investor can earn a better profit on short-term debt funds than what is offered on a savings account.
- It can be a good fit in the diversified portfolio that balances debt and money market instruments and provides optimal returns.
Risks of short-term mutual funds
- These are only short-term investments with a maximum maturity period of 3 yrs. Beyond that, they can’t withstand the inflation rate.
- Credit risk, a primary risk associated with debt instruments, is the risk of default on payment by the other party. In this case, you may lose your interest gains or the principal amount at maturity.
- Any changes in the interest rates can affect the short-term debt funds on a minimal level.
To conclude
Investments are not just for long-term goals but also the short-term. However, it is necessary to evaluate the risks and consider taking the advice of your financial planner before investing. In case you want to find short-term mutual funds based on specific parameters such as the expense ratio, rolling returns, and other metrics, you can use Tickertape Mutual Fund Screener to get the results in no time. Read Introducing Mutual Fund Screener: Find the Right Fund for Your Financial Goals to understand how to use the Mutual Fund Screener. Once you shortlist the mutual funds from the screener results, you can head to the individual Mutual Fund Pages on Tickertape to further evaluate them. Moreover, with our new Mutual Funds Portfolio, you can monitor your mutual fund holdings and gain deeper insights into the same.
FAQs
What are the factors to consider while investing in a short-term mutual fund?
The three key parameters that you should evaluate before picking a short-term mutual fund are risk, return, and expense, as explained below:
Return: The first and foremost factor to consider is the return provided by a mutual fund. Hence, the best way to analyse short-term mutual funds is to review their performances over the past years. You can consider funds that demonstrate consistent performance and have generated higher returns than the benchmark.
Risk: You should study the portfolio details to determine the risk associated with a fund. If most of the corpus is invested in high-quality assets, it implies that the fund may have a relatively lower risk. On the contrary, if you are an investor with a higher risk tolerance seeking greater returns, you may choose a fund focusing on high-risk investments as they tend to give high returns. However, this is not a guarantee.Â
Expense ratio: An expense ratio is levied on the investor to manage the fund. It is an annual maintenance charge that includes several components like management fees, maintenance fees, 12B-1 fees, brokerage fees, entry loads and exit loads. The investor must consider it at the time of analysis.Â
Who should invest in short-term mutual funds?Â
The key lesson for an investor is – not all investments suit everyone. Short-term mutual funds are best suited for investors who plan to invest their money for a shorter period. Short-term funds are an alternative to depositing your money in your savings account as they may help you earn higher returns than the interest rates provided by banks and improve liquidity.Â
These funds can also help you earn returns in the short term and reduce your investment risks. You may consider a portfolio that comprises high-grade assets and low downside risks. Generally, short-term mutual funds carry relatively lower risk because of the short maturity periods of their securities.
As an insatiable reader and learner, I’ve spent the last two years exploring the world of finance. With my creative mind and curious spirit, I love making complex finance topics easy and fun for everyone to understand. Join me on my journey as we navigate the world of finance together!
