Mutual Funds: Top 3 Short Term Investments

Written on Wednesday, November 4, 2015
By Vishwajeet Parashar- Senior VP & Group Head - Marketing, Bajaj Capital Ltd.

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When we talk about short term investments, there are actually no standard criteria of the term size. So what exactly is a short term? Well, ideally an investment made for a tenure which is less than 5 years can be categorized as short term investment, considering your immediate goals. If your child is let’s say in 10th standard and willing to go for B.Tech after his schooling, that means you would need a good amount after 3 years. This is your short term goal. You have a desire to own a car in next 3 years, this is again your short term goal and if you don’t have a well planned investment in place, it becomes difficult to achieve them. Here are the top 3 short term investment idea to fulfill your immediate and unavoidable goals or needs.



Liquid Funds


They are nothing but just another type of mutual funds investing in short-term government securities and deposits. As the investments are mostly into government papers, it can be considered as secure. Investors can easily enter and exit when they wish to, without paying any exit load.


Based on the past performances you can expect 4 to 7 % post tax return. Such investments are hassle free as the security where your money is invested has a short maturity of 4-91 days, carry AAA rating and is free from any default risk. So, it is recommended to go for funds which are high on credit rating and have low interest rate sensitivity.


Taxation in liquid funds is similar to other debt funds. You would be taxed according to your income tax slab in case your holding period is less than 3 years.


Ultra Short Term Funds


These funds are often termed as liquid plus funds and are a bit riskier than Liquid Funds as they primarily invest in short-term debt securities having a maturity period of 90 days to 1.5 Years. What you need to take care before opting to invest in them is primarily the maturity period of the underlying securities and of course the credit rating. In case of longer maturity term, interest rate risk goes higher. Similarly lower the credit rating, higher is the risk of default.


Unlike liquid funds, ultra short term funds have an exit load of 0.1 to 1% if you choose to redeem your investment before a specified time period (one week to six months). If compared to liquid funds, you can expect slightly better returns here with same taxation benefits.



Arbitrage Funds


These are equity funds and hence, they are more tax efficient when compared to the above two options. Arbitrage funds basically buy from one market and simultaneously trade it in another market, thus making a profit from a temporary difference. This is considered a riskless profit and there is close to no holding period. Post tax, you can expect close to 8% return from arbitrage funds.


However, it has been observed that investors confuse it with arbitrage plus funds. Investors need to differentiate between pure arbitrage and arbitrage plus funds. In the former, the equity component is completely hedged while the latter can take unhedged positions and carry a higher risk. Only eight of the 15 domestic arbitrage funds can be considered as pure arbitrage funds.


Watch out for the exit load in this fund category.



#Mutual fund investments are subject to market risk. Read the offer document carefully before investing.   

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