Pamela W. Holloway Short-term mutual funds are popular investments for investors seeking a balance between moderate risk and decent returns. Investors must understand the intricacies of this debt mutual fund category before investing in a short-term mutual fund. This article explains short-term mutual funds, elaborates on their features, and highlights their differences with ultra-short-term funds. Read this article to learn how to invest in short-term funds in India.
More about short-term funds as a debt fund category
Short-term mutual funds fall under the broader category of debt funds. Consider the following three points to distinguish between short-term funds and ultra-short-term funds in India:
- Short-term mutual funds have an investment horizon of one to three years, making them suitable for investors seeking a slightly longer duration than ultra-short-term debt funds, which typically have an investment horizon of three to six months.
- The primary objective of short-term mutual funds is to generate reasonable returns while maintaining a moderate level of risk. Fund managers achieve this by investing in a diversified debt and money market securities portfolio with varying maturities. These securities may include government securities, corporate bonds, certificates of deposit, commercial paper, treasury bills, and other fixed-income instruments.
- Short-term mutual funds do not have any SEBI (Securities and Exchange Board of India)-imposed restrictions on credit quality. This means that the fund managers have the flexibility to invest across various credit ratings. Investors should carefully assess the credit risk associated with the funds before investing.
How do you invest in short-term mutual funds?
Besides knowing the differences between short-term mutual funds and ultra-short-term funds, you must also understand how you can invest in the former. Consider the following three-point checklist before investing in a short-term mutual fund :
1. Assess your risk appetite and decide on an investment horizon
Investors with a moderate risk-taking appetite who seek a balanced blend of safety and returns should consider short-term mutual funds. If you have an investment horizon of one to three years and are saving for medium-term goals like buying a car or planning a family vacation, invest in a short-term fund. If your investment horizon is even shorter – between three and six months – you should choose an ultra-short-term mutual fund.
2. Research and select suitable funds:
Before investing, conduct thorough research on various short-term mutual funds available in the market. Pay attention to historical performance, expense ratio, portfolio composition, and fund manager’s track record. Focus on funds that align with your risk tolerance and financial objectives. Ultra-short-term funds and short-term mutual funds pose a moderate risk to investors. However, they are not risk-free.
3. Invest via SIP or lump sum:
Investors can invest in short-term mutual funds through a Systematic Investment Plan (SIP) or a lump sum mode. SIPs allow you to invest a fixed amount regularly, while lump sum investments involve a one-time buy. Your assessment of your financial goals before investing can help you choose one over the other. Be sure to use a SIP goal calculator before investing.
The investment horizon is the primary differentiating factor between ultra-short-term mutual funds and short-term mutual funds. Before investing in one of these two debt fund categories, you must be sure about your investment horizon.
