Short Term Mutual Funds

Q: Which are the best Short Duration Mutual Funds to invest in 2023?

These are top 5 Short Duration funds you can invest in 2023 Fund Name Fund Category ETM Rank Consistency 5 Year Return Bank of India Short Term Income Fund Debt 15 4.05% HDFC Short Term Debt Fund Debt 5 7.36% Nippon India Short-term Fund Debt 0 7.36% Mirae Asset Short Duration Fund Debt 6 6.74% Baroda BNP Paribas Short Duration Fund Debt 7 6.71%

Average Return 6.15%
No of Funds 22

How do Short Duration Funds Work?
Who should invest in Short Duration Funds
Taxation on Short Duration Funds
How to invest in Short Duration Funds?
Frequently Asked Questions

How do Short Duration Funds Work?

To understand how short-duration funds work, it is necessary first to understand the concept of duration and how it impacts the funds' investment decisions and returns.

Understanding Duration: The duration of a debt fund measures the extent to which the value of a fund fluctuates in response to changes in market interest rates. Duration represents interest rate risk. The higher the duration, the more volatile the fund value, and the greater its interest rate risk. There is a complex formula for calculating duration. Still, for most retail investors, it is enough to remember that the duration of a debt fund is closely linked to the maturity of bonds in its portfolio. Funds holding more long-maturity bonds have higher durations as compared to funds that hold mainly short-term securities.
Defining Short Duration: According to SEBI norms, short duration funds are expected to have durations between 1-3 years. This means that short duration funds can invest in the short term as well as slightly longer-term debt securities. In terms of interest rate risk, short duration funds are positioned at the lower end: higher than liquid, ultra-short duration, and low duration funds but lower than medium and long duration funds.
Where do short duration funds invest?: Short duration funds invest in a range of debt such as corporate bonds, government securities, securitized debt, derivatives, bonds issued by financial institutions, and public sector enterprises. They also hold a part of their portfolio in money market assets such as treasury bills, TREPs, commercial paper, or certificates of deposits to maintain liquidity. There are no credit quality norms for short duration funds; hence, they can invest in lower-rated debt to earn higher yields. The extent of exposure to lower quality debt will depend on a fund's investment style and prevailing credit/market conditions.
Sources of Earnings:: Short duration funds earn through interest as well as capital gains. Interest is generated from interest payments on the fund's debt holdings. In addition, when interest rates are falling in the market, the value of securities held by the fund increases, resulting in capital gains. Of course, when interest rates go up, the fund makes capital losses. The extent of capital gains or losses earned by a fund depends on its duration and the movement in market rates at that point. Short duration funds actively manage duration to benefit from changing interest rates. In general, short duration funds with higher exposure to long-term securities face more capital gains or losses. Funds that maintain durations at the lower end of the 1-3 year range are less likely to make capital gains or losses.

Who should invest in Short Duration Funds

Investors with an investment horizon of at least one year: Short-duration funds are usually recommended for investors who are willing to stay invested for at least one year; in fact, a horizon of 1-3 years may be better to get the best returns. An investor who redeems within a year may end up with capital losses if he or she exists when interest rates are rising. Thus, investors with shorter holding periods should opt for liquid funds or ultra-short duration funds.
First-time investors in debt funds: Investors who want to start building a portfolio of debt funds can begin by investing in short duration funds. These funds offer market-related returns along with moderate risk. Their returns are usually higher than those earned by liquid or overnight funds, while fund value volatility is lower compared to longer duration funds.
Investors seeking regular income: Short duration funds aim to provide stable returns, as they have a moderate interest rate risk. Investors with moderate risk appetite can allocate some money to short duration funds and use a Systematic Withdrawal Plan (SWP) to create a stream of income flows. An SWP is a facility that allows investors to systematically withdraw a pre-specified amount from mutual fund investments at regular intervals.
Investors who want an alternate short-term savings instrument: Short duration funds have the potential to earn more than bank deposits because they earn interest income as well as capital gains. They also earn more than liquid or overnight funds as they invest in relatively longer-term debt. In a rising interest rate market, such funds benefit from high short-term spreads. In a falling interest rate market, these funds may take exposure to longer tenor bonds to earn some capital gains.

Taxation on Short Duration Funds

Investors earn dividend income and capital gains from short duration funds. From the financial year 2020-21, investors will pay tax on dividends as per their tax bracket. Capital gains- or the difference between the purchase price and the selling price of the fund- are taxable. How capital gains are taxed depends on the length of time for which an investor holds the units of a debt fund before sale or redemption.

Short-term capital gains: If the units of a short duration fund are held up to 3 years, capital gains on sale are considered short-term capital gains and taxed at the income tax slab rate applicable to the investor.
Long-term capital gains: If a short duration fund is sold after being held for more than 3 years, capital gains are classified as a long-term capital gain for tax purposes. For long-term capital gains, investors get the benefit of indexation. This means that before calculating capital gain, the purchase price can be increased using an index provided by the Government, thus reducing the final taxable capital gain amount. Long-term capital gains are currently taxed at a rate of 20% post indexation.

How to invest in Short Duration Funds?

It is quite easy to invest in Short Duration mutual funds on ET Money. Here are the steps that you have to follow.

Register online on ET Money app or website
Head to Mutual Funds sections and choose the Short Duration fund you want to invest in.
Click on invest and choose the amount and mode of investment (SIP or Lumpsum)
Provide your KYC details (Pan number, Bank details) and complete your investment.

Frequently Asked Questions

Which are the best Short Duration Mutual Funds to invest in 2024?

These are top 5 Short Duration funds you can invest in 2024

Fund Name	Fund Category	ETM Rank	5 Year Return (Annualized)
Bank of India Short Term Income Fund	Debt	# 15 of 19	4.05 % p.a.
HDFC Short Term Debt Fund	Debt	# 5 of 19	7.36 % p.a.
Nippon India Short-term Fund	Debt	Unranked	7.36 % p.a.
Mirae Asset Short Duration Fund	Debt	# 6 of 19	6.75 % p.a.
Baroda BNP Paribas Short Duration Fund	Debt	# 7 of 19	6.69 % p.a.

How long should I stay invested in Short Duration Mutual Funds?

Since Short Duration Funds lend for the medium duration, you should invest in these funds for at least 1 to 1.5 years.

Where do Short Duration Mutual Funds invest?

Short Term Funds lend to companies for a period of 1 to 3 years. These funds mostly take exposure only in quality companies.

Are Short Duration Mutual Funds high risk?

Short Term Debt Funds primarily lend to good companies that have a proven record of repaying their loans on time. Their lending duration is also not too long. While you might see some volatility in the really short-term, they typically are a good option for at least a 1-2 year investment period.

What kind of returns can i earn from Short Duration ?

Short Duration Funds have on an average delivered 7.07% p.a. returns in the last 1 year. Their 3 and 5 year annualized returns are 6.15% and 6.71%. p.a.

Explore Other Top Categories

Show all fund Categories

Hide comparison

Short Term Mutual Funds

What is Short Duration Mutual Fund

Advantages of Short Duration Funds

Top schemes of Short Duration Mutual Funds sorted by last 5 year returns

Short Duration Funds Returns Calculator