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What does short term mutual fund has in store for you

by barneytalukdar

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Mutual funds are a popular investment option that people opt for these days. With the increasing popularity, these investments also offer people the option of short term mutual fund. They offer short term funds in the debt category that individuals can make for a short period of time. These were also known as liquid funds earlier. These funds invest money in the market instruments with a maturity of 91 days or less.

As these are open – ended schemes, investors with short term investment horizon or with a lot of cash and low risk appetite should consider investing in them. This scheme can be chosen by corporate as well as retail investors.Investors can choose the option of investing for either less than 15 days or for two-four months. In either of the cases you are secured from any interest rate volatility.

If you opt for a short term mutual fund for less than a period of 15 days then these funds are as good as a bank’s savings account that would give four per cent returns. This short term investment can also be compared to a bank’s fixed deposits, which will give you around nine per cent on an average.

In case you are looking for returns on a daily basis then the returns could be volatile given the day-to-day changes in the interest rate in the money market. But these investments tend to carry low interest rate risk because of the low maturity profile. As a category, mutual fund investments have high risk elements as compared to investing in a bank. A bank deposit can offer you an assurance up to Rs.1 lakh, mutual funds carry no such assurance. Plus you cannot issue cheques against the investment in these funds, like you can issue cheques against your savings bank account.

A good thing about these short term investments is that they do not charge any exit load from the investors. This saves you from parting from the profits made in the investment. However, while some short term funds have done away with the exit loads, some funds still continue to charge you. Hence, do check for this aspect when investing in a short term mutual fund. Other charges are similar to what one would pay for any other mutual fund scheme.

With this short term investment, the investors have the option of investing in either the growth or dividend option. These investments are treated similarly like bank fixed deposits when it comes to tax. The income generated is added to the investor’s income and taxed according to the tax slab. In the case of dividend the income tax is free at the hands of the investor, because the tax is deducted by the mutual fund itself.

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