Understanding Short Term Mutual Fund scheme: A Guide for Indian Investors

Mutual fund have become a popular investment option for many individuals in India, offering a range of choices to suit different financial goals and risk appetites. Among these, short term mutual fund scheme have gained attention for their potential to provide relatively better returns while maintaining a relatively low risk profile. This guide aims to help investors, especially those in Tier II and Tier III cities (Tier II and Tier III cities in India are the smaller urban centre’s experiencing growth and development, having population of Tier II cities range between 50,000 to 99,999 and Tier III cities range between 20,000 to 49,999)., understand what short term mutual fund schemes are, their benefits, and how to invest in them.

Short term mutual fund scheme is a type of debt scheme designed for investors with a short investment horizon, typically upto three years. These schemes invest in high-quality, low-risk securities such as government securities, corporate bonds, and money market instruments. The primary goal of short term mutual fund scheme is to provide liquidity and generate moderate returns with lower risk compared to long-term investments. (You are recommended to seek advice from financial advisor before you take any/refrain from any action)

There are several types of short term mutual funds, each catering to different investment horizons and risk profiles. For instance, liquid funds are suitable for investments of less than 91 days, while ultra-short duration funds are ideal for a tenure of 3-6 months. Low-duration funds are designed for an investment horizon of 6-12 months, and short-duration funds are suitable for 1-3 years.

One of the key benefits of short term mutual fund scheme is their liquidity and flexibility. Investors can easily buy and sell units of these schemes, making them a convenient option for those who may need access to their money on short notice. Additionally, short term mutual fund scheme typically carry lower risk compared to long-term investments, as they invest in securities with shorter maturity periods. This makes them an attractive option for risk-averse investors. (You are recommended to seek advice from financial advisor before you take any/refrain from any action based on your risk appetite and investment objective)

Another advantage of short term mutual fund scheme is their capability to provide relatively better returns.

(You are recommended to seek advice from financial advisor before you take any/refrain from any action)

Investing in short term mutual fund scheme is relatively straightforward. Here are the steps to get started:

1. Assess Your Financial Goals and Risk Tolerance: Before investing, it's important to understand your financial goals and how much risk you are willing to take. Short term mutual fund scheme are suitable for goals that are less than three years away.
2. Choose the Suitable Fund: Based on your investment horizon and risk tolerance, select a short term mutual fund that aligns with your goals. You can choose from liquid funds, ultra-short duration funds, low-duration funds, or short-duration funds.
3. Start a Systematic Investment Plan (SIP): SIPs allow you to invest a fixed amount regularly such as weekly, daily, monthly, or pre-determined frequency, making it easier to build your investment over time.
4. Consult a Financial Advisor: You are recommended to consult a financial advisor to choose or how to start investing based on your financial situation and goals and risk appetite.

 

Before investing in short term mutual fund scheme, there are several factors to consider:

• Expense Ratio: This is the fee charged by the fund house for managing the fund. A lower expense ratio means relatively better net returns for the investor.
• Fund Manager’s Experience: The performance of a mutual fund schemes is often influenced by the expertise of its fund manager. Look for schemes managed by experienced professionals with a good track record.
• Credit Quality of Underlying Assets: Ensure that the fund invests in high-quality securities with good credit ratings to minimize risk.

(You are recommended to seek advice from financial advisor before you take any/refrain from any action)

There are some common myths about short term mutual fund scheme that need to be debunked:

• Myth: Short term mutual fund scheme are risk-free: While they carry lower risk compared to long-term investments, they are not entirely risk-free. Market fluctuations can still impact their returns.
• Myth: They always provide relatively better returns: Returns from short term mutual fund scheme can vary based on market conditions and the performance of the underlying securities.
• Myth: They are only for large investors: Short term mutual fund scheme is accessible to all investors, with many schemes allowing investments as low as Rs. 100 through SIPs. (You are recommended to seek advice from financial advisor before you take any/refrain from any action)

Understanding the tax implications of short term mutual fund scheme is crucial. Short term capital gains (STCG) from these scheme are taxed as per the investor’s income tax slab rate. If the investment is held for more than three years, the gains are considered long term capital gains (LTCG) and are taxed at a lower rate with the benefit of indexation. (You are recommended to seek advice from tax advisors for understanding latest tax regulations)

In conclusion, short term mutual fund scheme offer a viable investment option for those looking to achieve their financial goals within a short period. They provide liquidity, lower risk, and the potential for relatively better returns . However, it is important to conduct thorough research, understand the associated risks, and consult with a financial advisor before making any investment decisions.

Investors are encouraged to explore more educational resources on mutual fund scheme and consider consulting with financial advisors for personalized advice. By making informed investment decisions, you can effectively grow your wealth and achieve your financial goals.

Additional Links:

What are the different types of Debt Funds?

Let’s Learn How to Invest in Securities Market

What is a Mutual Fund? - Beginner's Guide to Investing

SEBI Categorization of Mutual Fund Schemes