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An In-depth Guide to Investing in Short-Term Mutual Funds

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Short-Term Mutual Funds


As an investor, you have likely already dipped your toes into the vast ocean of investment opportunities available. However, have you considered short-term mutual funds? These financial products offer unique advantages, especially for those hoping to achieve specific financial goals in a shorter time frame.

This comprehensive guide will introduce you to the world of short-term mutual funds, helping you understand their benefits, risks, and how they fit into your investment portfolio.

* Understanding Short-Term Mutual Funds

Short-term mutual funds are a type of investment vehicle that pools capital from multiple investors to invest in a diversified portfolio of assets. The portfolio can include stocks, bonds, commodities, real estate, or even currencies.

Unlike investing in individual stocks or bonds, short-term mutual funds are designed to provide returns within a relatively short period, typically one year or less. This makes them an ideal choice for investors looking for quick returns without the need to constantly monitor market trends.

How Do Short-Term Mutual Funds Work?

The operation of short-term mutual funds is overseen by a fund manager, who selects the securities in which the fund will invest. The choice of securities is based on the fund's objective and risk tolerance.

These funds typically hold stocks with an average holding period of one year or less. As a result, they generally have low turnover rates and don’t buy and sell securities too frequently. This strategy minimizes transaction costs while potentially generating higher returns than longer-term funds.

* Advantages and disadvantages of Short-term Mutual Funds

Pros of Short-Term Mutual Funds

Cons of Short-Term Mutual Funds

Diversification: Reduces the risk of losses by investing in a variety of securities.

Market Risk: Performance tied to market fluctuations.

Professional Management: Managed by experienced fund managers with financial expertise.

Lack of Control: Investors have no say in the fund's specific investments.

Liquidity: High level of liquidity, allowing investors to buy or sell units at any time.

Fees and Charges: Various fees may reduce overall returns.

Potential for Higher Returns: Offers the potential for higher returns compared to traditional savings options.

Interest Rate Risk: Changes in interest rates can impact the fund's value.

* Short-Term Mutual Funds: Ideal for Specific Investment Goals

Short-term mutual funds can be a great option when you have specific financial objectives in mind. These could range from buying a new smartphone, planning a vacation, repaying a short-term loan, or even buying a motorcycle.

How to Prioritise Your Goals

To effectively utilise short-term mutual funds, categorize your goals based on their tenure and importance. For example:




0-3 Months

Emergency Goals

Unforeseen medical expenses, urgent home repairs,etc

4-12 Months

Ultra Goals

School fees, advance tax payments, buying expensive gadgets,etc

1-3 Years

Short-Team Goals

Planning a vacation, making a down payment for a house, etc.

Once you've categorised your goals, determine their importance. Essential expenses like emergency funds and school fees should take precedence over non-essential expenses like vacations or expensive gadgets.

* Selecting the Right Short-Term Mutual Funds

When choosing a short-term mutual fund, consider three key factors: safety of capital, liquidity, and potential returns.

* Factors to Consider in Short-Term Mutual Funds

Safety of Capital

Every investment carries some risk. Certain funds, like overnight or liquid funds, offer high safety with minimal negative returns.

Liquidity of Investments

Liquidity refers to how quickly you can convert your investment into cash. Savings accounts and certain debt funds, like liquid funds, provide instant redemption up to a specific limit.

Return Potential

A good short-term mutual fund should offer better returns than a regular savings account or fixed deposit.

* Factors to Consider Before Investing in Short-Term Mutual Funds

Return on Investment (ROI)

Understand the potential ROI of your investment. Set expectations for returns, considering factors like approvals or construction delays.

Risk Tolerance

Risk tolerance varies; even with low risk tolerance, find opportunities with a suitable return without excessive risk.

Investment Period

Every successful investment needs an exit strategy. Set an expected timeframe for selling or closing out your position.


Ensure quick selling of shares without significant costs or losses.


Understand the tax implications as high taxes can reduce net returns.

Inflation Rate

Consider the impact of inflation on the value of your assets and currency. Ensure it won't erode profits before deciding on an investment.

* An Overview of the Best Short-Term Mutual Funds for 2023

With countless mutual funds available in the market, choosing the right one can be a daunting task. Here are some of the best short-term mutual funds in India for the year 2023:

  • Franklin India Short-Term Income Plan - Direct Plan-Growth

  • Edelweiss Banking and PSU Debt Fund - Direct Plan-Growth

  • Nippon India Short-Term Fund - Growth

  • IDFC Bond Fund - Short-Term Plan Regular Plan-Growth

  • Aditya Birla Sun Life Money Manager Fund - Direct Plan-Growth

Aditya Birla Sun Life Money Manager Fund - Direct Plan-Growth

This fund seeks to generate regular income through investment in a portfolio comprising money market instruments.

Sahara Liquid Fund Variable Pricing Direct-Growth option

This fund aims to provide high liquidity and reasonable returns through a highly liquid portfolio of good-quality debt and money market instruments.

Quant Active Fund Growth

This fund aims to provide long-term capital appreciation and generate income with a diversified portfolio of Large Cap, Mid Cap, and Small Cap companies.

* Conclusion

If you're looking for a short-term investment, short-term mutual funds could be the ideal choice. They offer instant diversification, professional management, and potentially higher returns than traditional savings accounts or fixed deposits.

However, remember that investing in a mutual fund involves risks. Always do your due diligence and consult with a financial advisor before making any investment decisions.

And if you're looking for a platform to start investing in short-term mutual funds, consider AssetPlus. As one of the fastest-growing Fintech platforms in the Mutual Fund industry, AssetPlus offers comprehensive technology and MFD business solutions to help you increase your digital brand presence and grow your Mutual Fund business online.

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