Benefits of investing in Short-Term Funds explained!

Short-Term Funds are Open-Ended Debt Mutual Funds. According to SEBI’s regulations, their investment duration ranges from one month to three years. They may provide greater returns depending on the market conditions. You can invest in them as an alternative to Fixed Deposits and offer better returns with a short maturity period. A Short Term Fund invests in Debt securities and is moderately low in risk.

It also offers better tax benefits than Bank FDs if held for over three years. It is ideal for people with idle money for investment to get better returns. The following are the benefits it offers:

Offers portfolio diversification

Short-Duration Funds diversify and balance your portfolio. These schemes are less risky than Equities that involve longer investment tenures and can offer attractive returns within three years. You can invest in them through Lumpsum Investments or Systematic Investment Plans. Under Lumpsum Investments, you invest all your corpus at once. Meanwhile, SIPs let you invest a fixed sum at pre-determined intervals like monthly, quarterly, annual, half-yearly and weekly.

Helps attain financial goals

Whether you want to invest your money for a few months or up to three years, Short-Term Mutual Funds can be a favourable investment option providing decent potential returns. They provide a higher post-tax return than other investment avenues, such as FDs. You can attain your financial goals with the returns obtained.

Provides stable returns

All Short-Duration Funds are Debt Funds categorised on the holding tenure. Debt Funds are safer than Equity Funds since they invest in fixed-income instruments such as Treasury Bills, money market securities, Corporate Bonds, and government securities. You can invest in Short-Term Funds online or consult a financial advisor for further information.

How are they taxed?

Concerning taxation, Short Term Funds are divided into growth or dividend options. Your investment falls under Bank FDs in the growth option. The interest you earn on your FD is taxable at 10%. The overall gains from the best Short-Term Fund are treated as a portion of your earnings and taxed according to tax slabs.

Who can invest?

Investors who want to invest for a year to three years can choose these funds. A Short-Term Fund is suitable for risk-averse investors who require favourable returns with liquidity. First-time investors building their Debt Fund portfolio can also avail of these.

Conclusion

Short-Term Funds, unlike Index Funds, require active management and are volatile. Some expenses are involved in fund management, called an expense ratio. The fund manager imposes it as a ratio of the gains and returns earned on the investment.