Short Term Mutual Funds: A Smart Choice for Short-Term Goals

Posted on Wednesday, April 2nd, 2025 | By IndusInd Bank

Not all investments are meant for the long haul. Sometimes, you just need a smart place to park your money for a couple of years—maybe for that dream vacation, a home renovation, or even your child’s school fees.

In this blog, you will find general information about short duration mutual funds. However, it is always a good idea to consult a SEBI-registered financial advisor before making any investment decisions.

While a savings account feels too slow and fixed deposits too restrictive, short-duration mutual funds offer a middle ground. They let you earn potentially better returns while keeping your money relatively accessible. Sounds interesting? Let’s break it down.

What are Short Duration Mutual Funds?

Think of short-duration mutual funds as the middle child of the debt fund family—steadier than liquid funds but more flexible than long-term bond funds. They primarily invest in bonds and fixed-income securities with maturities ranging between one and three years. The idea is simple: lend your money to high-quality borrowers (corporates, government entities) for a short period and earn interest in return.

Unlike fixed deposits, where your returns are fixed from day one, these funds can give slightly better yields, though they fluctuate based on interest rates and market conditions. They are designed to strike a balance between risk and reward, making them a go-to choice for those who want stability with a little extra earning potential.

Also Read: Different Types of Mutual Funds & Their Benefits

Why Consider Short Duration Mutual Funds?

Here’s why many investors find these funds appealing:

• Potential for Higher Returns: Typically, they offer better returns than savings accounts and fixed deposits of a similar tenure. But keep in mind, the returns aren’t guaranteed.
• Lower Interest Rate Risk: Unlike long-term bond funds that swing wildly with interest rate changes, short duration funds are relatively stable because their securities mature sooner.
• Liquidity and Flexibility: Need your money back? No problem. Unlike fixed deposits that charge a penalty for early withdrawals, most short duration mutual funds allow you to redeem your money quickly, often within 24–48 hours.
• Diversification Benefits: These funds spread investments across corporate bonds, government securities, and money market instruments. This mix helps reduce risk because even if one investment underperforms, others can balance it out.

Things to Keep in Mind Before Investing in Short Duration Mutual Funds

Of course, no investment is completely risk-free. Here’s what you should be aware of:

• Credit Risk: While fund managers aim to pick high-quality bonds, there’s always a chance that some issuers may struggle to repay. Checking the credit ratings of the securities in the fund can help you gauge the risk level.
• Market Risks: Even though these funds are less volatile than equity funds, interest rate movements can impact returns. If rates rise, the value of existing bonds may fall, affecting the fund’s performance.
• Exit Load and Expense Ratio: Some funds charge a fee if you exit too soon. Also, each fund has an expense ratio—the cost of managing the fund—which can eat into your returns. A high expense ratio means you take home less, so it’s worth comparing before you invest.

Who Should Consider Short Duration Mutual Funds?

Short duration mutual funds are a great fit for:

• Investors with Short-Term Goals: If you’re looking to invest for one to three years and want better returns than a savings account, these funds can be a smart option.
• Those Looking for a Middle Ground: If fixed deposits feel too restrictive and equity funds too risky, short duration funds offer a comfortable middle ground.
• People Seeking Liquidity: Unlike fixed deposits, where withdrawing early can mean penalties, these funds provide easy redemption—usually within a couple of days.

How to Get Started with Investments in Short Duration Mutual Funds?

Thinking of giving short duration mutual funds a shot? Here’s how to choose the right one:

• Check the Portfolio Quality: Look for funds that invest in AAA or AA-rated bonds to minimise credit risk.
• Analyse Past Performance: While past performance isn’t a guarantee of future returns, it does give you a sense of how the fund has performed in different market conditions.
• Consider the Fund Manager’s Track Record: A good fund manager makes all the difference. Look for one with a solid track record of managing debt funds successfully.
• Compare Expense Ratios and Exit Loads: Lower costs mean you get to keep more of your returns, so it’s always worth checking these numbers before investing.

Taxation Aspects of Selling Mutual Funds

Tax is a key factor in any investment decision. Here’s how short duration mutual funds are taxed in India:

• Short-Term Capital Gains (STCG): If you sell your investment before three years, the gains are added to your income and taxed as per your income tax slab.
• Long-Term Capital Gains (LTCG): If you stay invested for more than three years, your gains are taxed at 12.5% after indexation, which helps reduce your taxable amount by accounting for inflation.

Wrapping Up!

Short duration mutual funds can be a great way to make your money work harder without taking on excessive risk. They offer a practical alternative to savings accounts and fixed deposits, especially if you need a place to park your funds for a few years. However, as with any investment, it’s wise to evaluate your financial goals and risk tolerance before diving in.

Have you explored short duration mutual funds before? If not, it might be worth a look—after all, making informed choices is the key to financial success! If you’re considering investing in mutual funds, explore IndusInd Bank’s Wealth portal for a seamless and hassle-free investment experience.