What are short term mutual funds and should you invest in them?

In a world that is racing against time and looking for quick recipes, 15-minute meetings, 1 min reels, and SMS abbreviations to cut short words, wanting a short-term investment is only justified. You can have various immediate needs that may demand relatively faster solutions. Short term mutual funds cater to such needs.

Find out more about short term mutual funds to use them effectively for your goals. 

What are short term mutual funds?

The name says it all! Short term mutual funds, also known as short duration funds, are a type of debt mutual funds in India that typically have a short maturity period ranging from a year to three years on average. These open-ended schemes invest in debt instruments such as certificates of deposits, government securities, corporate bonds, etc.

Should you invest in short term mutual funds?

A short-term mutual fund scheme can be ideal for your immediate financial needs. Debt mutual funds in India carry relatively lower risks. Additionally, they may offer better returns than other traditional investments and savings options. These funds are also highly liquid. So, you can consider them if you have an investment horizon of up to three years and want the option of having immediate access to your money anytime. 

What are the advantages and disadvantages of short term mutual funds?

Here’s a list of pros, so you can be further sure of whether or not to invest in short term mutual funds:

1. Low risk:Short term mutual funds are debt funds and hence carry low risk compared to equity funds. They can be suitable for you if you have a low risk appetite or if you are not looking for high volatility in your investments. 
2. Good for diversification:Irrespective of your goals, debt mutual funds can help you diversify your portfolio and lower overall portfolio risk. If you have a portfolio that is concentrated on long-term investments, such as equity funds, you can consider adding some short-term investment options, such as a short term debt mutual fund.
3. Stable returns:Since short term mutual funds invest in certificates of deposits, government securities, treasury bills, corporate bonds, money market instruments, etc., the returns are relatively more stable than stocks. 
4. Option of SIPs: You can invest in short term mutual funds through a Systematic Investment Plan (SIP). This helps you break down your investment into smaller instalments of a chosen SIPs reduce the investment burden and help you build financial discipline that contributes to achieving your goals sooner. 

There may also be some cons of short term mutual funds, such as:

1. Risks: Even though short term mutual funds are relatively low-risk investment options, they can expose you to credit risk, liquidity risk, and inflation risk. 
2. Low returns than equity: Compared to equity mutual funds, the returns generated by short-term funds can be rather low. These may not be ideal for all types of goals.
3. Affected by the prevailing rate of interest: The rate of interest prevailing at a given time impacts the Net Asset Value (NAV) of debt funds. If the interest rate rises, the value of your fund decreases and vice versa. The more the interest rate fluctuates, the more it can affect the fate of your investment.  

Can you meet your goals with short-term mutual funds?

Short-term mutual funds are an effective option for achieving financial goals that are closer on the horizon. Whether it is planning for a vacation, making a down payment for a car, or building an emergency fund, these funds cater to investors seeking lower risk and faster liquidity. Opting for a short term investment mutual fund enables you to capitalise on stable returns while maintaining the flexibility to withdraw your money as needed. These funds typically invest in low-risk instruments like government securities, treasury bills, or corporate bonds, making them suitable for conservative investors.

A SIP for short term is an excellent way to systematically invest in these funds. It allows you to contribute smaller amounts regularly, reducing the financial burden of a lump-sum investment. With a sip for short term, you can align your savings with specific goals while benefiting from rupee cost averaging, which reduces the impact of market volatility. This approach is particularly advantageous for individuals who prefer a disciplined and predictable savings method.

Additionally, short term SIP investment plans are ideal for those looking to park surplus funds for a few months to a few years. These investments offer better returns than traditional savings accounts or fixed deposits while maintaining relatively lower risks. A short term SIP investment also allows investors to earn consistent returns, making it a reliable tool for meeting financial objectives.

Therefore, while long-term investments focus on wealth creation, short-term options like a short term investment mutual fund cater to immediate and intermediate goals. By using a SIP for short term, investors can enjoy the dual benefits of disciplined savings and financial flexibility. With the right planning and choice of funds, short-term mutual funds can effectively meet your immediate financial needs.

Conclusion

Short term mutual funds may not be suitable for all goals, but they can be used effectively to invest your surplus funds or when preparing for an approaching financial need. They are also good diversifiers and help bring down risk in a portfolio.

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