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Invest in best short term funds in 2022

Looking for best short-term mutual funds to invest in India? Click here to check the complete list of top performing short-term mutual funds for optimum returns.

People invest in debt funds for a shorter duration for various reasons. Among debt funds, there are various schemes available for short-term investments. This blog will focus on how to invest in the best short-term funds in 2022.

Debt funds for short term investment

Some investors use short-term debt funds to park the surplus amount for a shorter duration till they figure out how to invest the amount for the long term. An individual may have received a surplus amount from:

  1. The previous employer in the form of gratuity, leave encashment, Employee Provident Fund (EPF), etc.
  2. Maturity of a fixed deposit or redemption of mutual fund investment or sale of an asset
  3. The current employer in the form of an annual bonus

An investor can choose from the following debt fund schemes to invest for the shorter term:

  1. Overnight fund
  2. Ultra-short duration fund
  3. Low-duration fund
  4. Short-duration fund
  5. Liquid fund
  6. Money market fund etc.

In this blog, we will focus on low-duration funds.

Best low-duration funds

Scheme name
(Direct Plan - Growth Option)
(Rs. crores)
(Absolute Returns)
Franklin India Low Duration Fund4316.53%7.78%8.21%
Kotak Low Duration Fund9,2214.58%6.88%7.40%
Aditya Birla Sun Life Low Duration Fund15,1584.68%6.93%7.31%
HDFC Low Duration Fund18,4374.67%6.85%7.05%
Axis Treasury Advantage Fund7,9004.31%6.51%7.00%

The above table shows that low-duration funds mutual fund schemes have given low to moderate returns in the last five years. The top five funds have given a 7% to 8.2% CAGR return, which is a decent return.

Who should invest in low-duration mutual funds?

Investors who want to park their surplus money for a shorter duration can invest in low-duration funds. They can figure out how to invest the money for the long term during this time. The fund manager's focus is on capital preservation with optimum returns. The investor will have to be content with low to moderate returns.

Taxation of low duration mutual funds

From a taxation point of view, any mutual fund scheme with a minimum of 65% of its total assets in equity and equity-related instruments is classified as an equity scheme. Low-duration funds are treated as non-equity funds and taxed accordingly.

  1. Short-term capital gains (STCG) tax: If you redeem your low-duration mutual fund units within thirty-six months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) will be added to your overall income and taxed as per the income tax slab that you fall in. 
  2. Long-term capital gains (LTCG) tax: If you redeem your low-duration mutual fund units after thirty-six months of purchase, the capital gain will be classified as long-term capital gain (LTCG). The long-term capital gain (LTCG) tax will be levied at 20% with indexation benefit and 10% without indexation.

Risks involved in low duration mutual funds

Most debt funds are exposed to two types of risks:

  1. Interest rate risk: Bond prices and market interest rates have an inverse relationship. When market interest rates are rising, the bond prices fall. It affects the NAV of the debt fund negatively. Similarly, when market interest rates are falling, the bond prices rise. It affects the NAV of the debt fund positively. Funds with a longer duration are more sensitive to interest rate changes, and funds with a shorter duration are less sensitive to interest rate changes. Low-duration funds, as the name suggests, have a low duration. Hence, the sensitivity to interest rate changes is lower than debt funds with a higher duration. While the interest rate sensitivity is low for low-duration funds, it is not completely ruled out.
  1. Credit risk: Credit risk refers to the risk of default on repayment of principal or interest or both. A low-duration fund usually invests in securities with a high credit rating and a lower tenure. While the probability of default is low, it cannot be ruled out completely. The fund manager tries to lower the impact of a default by building a diversified investment portfolio.

Returns potential of low duration mutual funds

Low-duration funds have the potential to provide low to moderate returns. The fund manager invests in debt securities with a high credit rating and a low duration. Fixed income securities with a combination of a high credit rating and a low duration usually pay a low to moderate interest rate. Hence, the returns potential of low duration mutual funds is low to moderate returns.

These funds are suitable for investors with a conservative to moderate risk profile. Since the investment tenure is short, the focus is more on capital preservation than generating returns. Hence, investors have to be content with low to moderate returns.

Advantages of low duration mutual funds

Some of the advantages of low duration mutual funds include:

  1. They provide investors with an opportunity to invest in fixed-income instruments with a high credit rating. These instruments are safer than instruments with a lower credit rating.
  2. The expense ratio of low duration funds is lower than many other equity and debt mutual fund schemes.

Reasons to invest in a low duration fund

The primary reason for most investors to invest in short-term funds is to park their surplus for a shorter duration of time. They use this time to figure out how to invest the money for the long term. During this period, the money can be invested in a low-duration fund rather than keeping the money in a savings account.

To start investing in fixed income mutual funds as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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