Short Duration Mutual Funds

Looking for an investment option where you can make higher returns as compared to a savings bank account? Short Duration Mutual Funds might be a good fit. They are debt mutual funds that hold top-notch fixed income securities in relatively lower maturities, thus enabling them to give stable gains at relatively low risks.

What are Short Duration Mutual Funds?

Short Duration Debt Mutual Funds are debt mutual funds whose investments consist mainly of fixed income instruments like corporate bonds, government bonds, treasury bills, and money market instruments, and the maturity profile of these instruments leads to a fund duration of 1 to 3 years.

Given their short duration, the impact of interest rate fluctuations is less on these mutual funds than on long-duration debt funds.

Features of Short Duration Mutual Funds

• Low Interest Rate Risks: Since the underlying securities have shorter maturities, these funds are less sensitive to interest rate fluctuations compared to long-term debt funds.
• Possibility of Stable Income: The fund holds fixed income assets that provide stable income and hence stable earning potential.
• Highly Liquid: Investments can be bought and sold on any working day, making them highly liquid investment choices.

Diversified Debt Investment Portfolio: The debt fund manager invests in diversified debt instruments, which helps in limiting the risks associated with concentrated investments.

• Short-to-Medium Term Goals: These types of funds are most suitable for objectives with one year to three years time horizons like travel, higher education costs, car purchase, or an emergency fund.

How to Invest in Short Duration Funds?

You can invest in short duration funds by following simple process:

Step 1: Choose investment mode. You can invest through:

• AMC websites
• Online investment platforms provided by stockbrokers
• Mutual fund distributors

Step 2: Choose a suitable short duration fund.

Step 3: Choose between Systematic Investment Plan (SIP) and Lump sum based on your goal and make investment.

Step 4: Make payment through UPI, netbanking or other available methods.

Why to Invest in Short Duration Funds?

• Higher Return Potential: The Short Duration Debt Mutual Funds provide higher return potential compared to normal savings instruments while being comparatively less risky.
• Ideal Investment for Risk-Averse Investors: For investors who wish to preserve their capital and don’t want to invest in risky stock markets, such funds will be an ideal choice.
• Diversification in Portfolio: Inclusion of debt funds in a portfolio helps in diversifying investments as well as in managing investment risk.
• Less Sensitive to Change in Interest Rates: As compared to debt funds having long duration, short-term debt funds are less sensitive to changes in interest rates.

Taxation of Short Duration Mutual Funds

Investments Made on or After April 1, 2023: All capital gains arising due to the redemption of units of short duration mutual funds will be considered Short-Term Capital Gains (STCG) irrespective of the period for which the investment is held. These capital gains are included in the income of the individual and are taxed at the income tax slab rates. There is no provision for indexation in this case.

For Investments Before April 1, 2023 (Old Investments):

• If the units are sold within 2 years, the gains will be considered as Short Term Capital Gains and taxed based on the investor's income tax bracket.
• If the units are kept for more than 2 years, the gains can be considered as Long Term Capital Gains (LTCG) and will be taxed at 12.5% without any indexation benefit.