Best Short Term Mutual Funds - Features, Criteria, How to Invest & Tax Implications
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Selecting the right short-term mutual fund is essential to achieve your financial goals effectively. This process holds significance as it directly influences the risk, return and tax implications of one's portfolio and financial goals. The journey towards financial success begins with understanding the importance of aligning investments with specific financial objectives. This post provides detailed insight into selecting the best short-term mutual funds and making informed decisions that suit individual financial goals.

Understanding Short-Term Mutual Funds

Mutual funds that have lower maturity periods are called short-term mutual funds. The maturity period usually ranges between 91 days to 3 years. These funds are often compared to savings bank accounts and fixed deposits as they have slightly higher returns with high liquidity. Although the main difference between a short-term mutual fund and other investment options is the maturity period, it has different liquidity and risk to return. It is suitable for investors looking for risk-averse investment options.

Key Features of Short-Term Mutual Funds

Below are a few of the key features of short-term mutual funds.

  • Short-term mutual funds have low-risk, high-quality funds with a limited maturity period.
  • The maturity tenure varies between 91 days to 3 years.
  • It has less risk due to the shorter maturity period of underlying securities.
  • These funds offer higher returns compared to Fixed Deposits and Savings accounts.
  • Short-term mutual funds have high liquidity.
  • Encourages categorising goals into short-term, mid-term, and long-term for strategic planning.
  • It helps investors with aligning investment strategy to the respective time horizons of their financial goals.

Criteria for Evaluating Short-Term Mutual Funds

There are a few factors to consider before selecting a short-term mutual fund. They are as follows:

  • Past Performance: Evaluate the fund's past performance as an indicator of potential returns. However, past performance statistics may not guarantee accurate results.
  • Expense Ratios: Consider the expense ratio, capped by SEBI at 2.25% for debt funds, influencing returns.
  • Risk Profiles: Evaluate the risk profile, considering factors like liquidity risk, credit risk, and interest rate risk for Debt funds.
  • Balancing Risk and Return: Aim to balance the risk and return of your investments by aligning them with your specific financial goals.

Tax Implications

When considering short-term mutual funds, it is important to analyse the tax implications, particularly those associated with growth options that are taxed based on individual slab rates. Analysing tax-efficient options, such as debt funds and liquid funds, can be beneficial in optimising returns while managing tax liability. As the tax regulations are complex, it is best to take personalised advice from a professional tax consultant. Their expertise can provide valuable details about the most tax-efficient strategies that align with your financial goals.


Choosing the right short-term mutual fund is pivotal for financial goals. With maturity periods of 91 days to 3 years, these funds offer higher returns and liquidity akin to savings accounts. Evaluating past performance and expense ratios and understanding tax implications is vital. Aligning investments with specific goals and seeking professional advice ensures informed decisions for optimal short-term fund selection.

Frequently Asked Questions (FAQs)

Q: Which MF is best for short-term investment?

There are many short-term Mutual Funds you can select from. A few of them are HDFC Low Duration Fund, SBI Magnum Low Duration Fund and Nippon India Short Duration Fund.

Q: Can I invest in SIP for 6 months?

Yes, you can invest in SIP for 6 months. Low-duration SIP allows you to save a surplus amount to reach your short-term goals.

Q: What is the best way to research short-term mutual funds and gather information about them?

While researching the best short-term mutual funds, consider factors such as the return over the past years, the risk involved, favourable tenure and alignment with your goals.

Q: Are there tax implications associated with short-term mutual funds, and how can I make tax-efficient investment choices?

Yes, short-term mutual funds are taxable as per the investor's tax slab. To make tax-efficient investment choices, you can select debt funds or tax-saving funds that provide deductions under Section 80C of the Indian Income Tax Act.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.