Short-term funds are an open-end investment with a relatively shorter maturity period. It predominantly invests in a range of money and debt market securities, for 1 to 3 years. If you are looking for investments with a shorter time horizon, or you are new to the world of mutual funds, short-term funds could be useful for you. These funds might carry a moderate level of interest-rate risk from their debt holdings. Thus, they can also be useful, if you seek regular income.
Here’s a list of things you should consider when investing in them. To find out more, read on.
Cost is one of the most crucial factors to consider when buying short-term funds. The fund-providing companies charge a fee to manage your funds, known as the expense ratio. This ratio is regulated by the SEBI (Securities and Exchange Board of India) guidelines. The cost of investing depends on the expense rate and amount of return you gain on the investment.
The objective is another very important factor to consider. Usually, these funds are meant to help invest your money for a specific period of time. However, you can also set up an STP (Systematic Transfer Plan) by investing a lump sum to transfer it to a more high-performance/high-risk vehicle. You can also set up an SWP (Systematic Withdrawal Plan) by investing a part of your superannuation and incur a regular income.
Marketable securities can offer ways for a steady accumulation of wealth. It usually provides a 7% to 10% interest on your investments. Also, they prove very beneficial when the overall economy is experiencing a downturn, or there is a bearish climate in the market. To understand the performance of a short-term fund you can track its returns over a 1-year, 2-year, or 3-year period.
If the short-term fund invests in the highest quality bonds, which are AAA-rated, it means they are very high in quality and relatively safer types of investments. These are preferred by so many investors to park their money while they search for competent options. However, it is a mutual funds instrument and thus, not completely immune to market risks. On the other hand, funds that invest in securities with a credit rating lower than AA can have higher risks.
Tax on Returns
While investing in these funds you may earn taxable returns. In any fund, the tax calculation depends on how much time you stay invested. For instance, you can save tax on short-term funds if you stay invested for over three years because then it falls under the LTCG (Long Term Capital Gains) category which is subjected to benefits on tax under section 80C of the Income Tax Act. Investing in an ELSS (Equity Linked Saving Scheme) is also a very good option if tax benefit happens to be one of your main objectives.
Short-term funds can be a very useful instrument. It aids fund management. Besides, it can be useful to anyone lacking the confidence to make bigger commitments. But make sure to study as much as possible so that you can make an informed decision.