Short Term Mutual Fund: Meaning, Features & Benefits

Investing in short term mutual funds in India has become increasingly popular, allowing investors to park their funds temporarily while maximizing their returns. Investors seeking returns and liquidity may consider short term mutual funds. On short investment horizons, these funds aim to offer stability and growth. In this article, let’s understand about this fund, its features and benefits.

What is Short Term Mutual Fund?

A short term fund or low duration fund typically has a portfolio duration of six months to three years. They invest in money market instruments, certificates of deposit, and short term government and corporate bonds. They are less sensitive to market fluctuations since they focus on shorter maturities, which minimise interest rate risk. These funds are often attractive to investors seeking liquidity, capital preservation, and a modest yield. Since these funds are flexible, fund managers can quickly adapt to changing market conditions, making them a convenient option for conservative investors.

Features of Short Term Mutual Fund

Before investing it is crucial to understand the fund’s features. Here are some of the features associated with short term funds:

•     Investment duration: Typically, short term funds are invested for one to three years. Investing in them is suitable for investors with short term investment horizons or who need quick access to their funds.

•     Low risk: Compared to longer-term investments, short term funds are considered to have lower risks. Their primary focus is on high-quality, low-risk debt instruments, such as government securities and treasury bills. Generally, these investments have a short maturity period and are relatively stable in value.

•     Liquidity: Liquidity is one of the primary characteristics of short term funds. Redeeming investments and getting funds quickly is usually possible without significant penalties or restrictions. As a result, short term funds are suitable for individuals with a need for quick access to capital.

•     Stable Net Asset Value (NAV): To ensure minimal fluctuations, short term funds aim to maintain a fixed net asset value per share. NAV can still experience minor fluctuations, but the goal is to keep the value relatively stable.

•     Income generation: A short term fund generates income through interest payments received on the underlying investments. Returns are typically modest, but can vary depending on interest rates and the portfolio composition.

•     Diversification: A short term fund seeks to diversify its investments across different issuers, sectors, and debt instruments. In this way, risk can be mitigated and stability can be maintained.

Benefits of Investing in Short Term Mutual Fund

Individuals may choose to invest in short term funds for several reasons. Here are some of the benefits of investing in short term fund:

•     Liquidity: The liquidity of short term funds allows you to access your funds quickly when needed. The advantage of investing in short term funds is that if you plan on needing cash soon, your money is readily available without being subject to any significant penalties.

•     Capital preservation: The majority of short term funds invest in low-risk debt instruments, such as government securities and high-quality corporate bonds. The goal of these investments is to preserve capital and provide stability to your portfolio. A short term fund can be suitable option for conservative investors who want to protect their principal while earning some income at the same time. Investors can invest in these funds through a mutual fund app.

•     Stability: Funds with a short term investment horizon strive to maintain a stable net asset value (NAV) per share. Although there may be minor fluctuations, the goal is to maintain a relatively constant value. For investors who want to avoid the volatility associated with riskier assets such as stocks or longer-term bonds, this stability may be appealing.

•     Income generation: In spite of their low-risk investments, short term funds still generate income through interest payments. The returns from short term funds may be modest compared to riskier assets, but they aim to provide a steady income stream. People who rely on investment income for their day-to-day expenses can particularly benefit from this fund.

•     Risk diversification: You can diversify your investment portfolio by including short term funds. Investing across asset classes and durations reduces the concentration of risk in any one investment. A short term fund can help balance and diversify a portfolio by providing a counterbalance to higher-risk assets.

•     Easy management: Typically, short term funds are managed by professional investment managers who select and monitor the securities. In this way, individual investors do not need to research and manage individual bonds or debt instruments. Short term fund managers offer convenience and expertise to investors who prefer a hands-off approach to investment management.

Conclusion

Investing in short term mutual funds offers stability, liquidity, and modest returns. By investing in low-risk debt instruments, these funds preserve capital while generating income through interest payments. Conservative investors looking for a balanced portfolio can benefit from short term funds. By incorporating short term funds into their investment strategy, investors can enhance portfolio stability, mitigate risk, and ensure quick access to funds when needed.

Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.

Past performance may or may not be sustained in future. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.