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2 mins Read | 5 Months Ago

What is a Short Term (Low Duration) Mutual Fund Investment?

High dividend-paying stocks & Mutual Fund schemes

Short-term (low duration) Mutual Funds are a strategic choice for investors seeking a balance between returns and liquidity in the dynamic investment landscape. These funds are designed to cater to short investment horizons and offer a unique combination of stability and growth. In India, short-term Mutual Fund investments have gained significance, allowing investors to park their funds briefly while optimising returns. Let us explore these funds and see how they align with the financial objectives of the investors in the ever-changing market scenario.

Short-term Mutual Funds in detail

Short-term Mutual Funds, also known as low duration funds typically have a portfolio duration ranging from 6 months to 3 years. These funds invest in money market instruments, certificates of deposit and short-term government and corporate bonds. Since they focus on shorter maturities, they minimise interest rate risk, which makes them less sensitive to market fluctuations. Investors looking for liquidity, capital preservation and a modest yield often find these funds attractive. The flexibility of these funds allows fund managers to quickly adapt to the changing market conditions, making them a convenient option for conservative investors with moderate risk appetite.

Why should investors choose short-term Mutual Funds?

Short-term Mutual Funds offer many advantages that make them a good choice for investors:

  • Safety

These funds mainly invest in low-risk securities, making them a safe option. They aim to preserve your capital while generating modest returns 

  • Liquidity

Short-term Mutual Funds are highly liquid, meaning that you can access your money quickly and without significant penalties. This liquidity makes them suitable for emergency funds or short-term financial goals

  • Steady returns

Short-term Mutual Funds may not offer sky-high returns but aim for stability and consistency. Investors can expect reasonable returns with minimal volatility

  • Diversification

 These funds spread investments across various instruments, reducing the risk associated with a single asset. Diversification helps protect investments from significant downturns

  • Low minimum investment

Short-term Mutual Funds typically have low minimum investment requirements, making them accessible to many investors including those with limited funds to spare.

How do Short-term Mutual Funds work?

Short-term Mutual Funds focus on a diversified portfolio of short-term fixed-income securities. The following explains how these funds work:

  • Investment portfolio

 Short-term Mutual Funds in India build a diversified portfolio comprising of money market instruments, certificates of deposit and short-term government and corporate bonds

  • Maturity period

 These funds focus on securities with shorter maturities typically 6 months to 3 years, reducing interest rate risk and making them less prone to market fluctuations

  • Risk mitigation

The strategic allocation of shorter-duration assets aims to reduce the interest rate risk, providing investors with a more stable investment option than longer-term instruments

  • Balance of stability and returns

Short-term Mutual Funds aim to balance the stability offered by Fixed Deposits and the potential for higher returns from longer-term investments, appealing to investors with a moderate risk appetite

  • Adaptability

 Fund managers can quickly adapt to changing market conditions, ensuring flexibility in the portfolio, aligning with the Reserve Bank of India's monetary policies and interest rate movements

  • Liquidity and capital preservation

Investors in the Indian market often turn to these funds for liquidity, capital preservation and a reasonable yield especially during periods of economic uncertainty. 

Types of short-term Mutual Funds

 There are different types of short-term Mutual Funds to choose from that cater to various risk appetites and investment goals. Here are a few common types:

  • Liquid Funds

These funds invest in highly liquid Funds  assets like treasury bills and Commercial Paper (CP). They are suitable for parking funds short-term, offering excellent liquidity and low volatility

  • Ultra Short-Term Funds

These funds invest in slightly longer-term securities than Liquid Funds providing higher returns while maintaining low risks. They are ideal for short-term goals and emergency funds

  • Money Market Funds

Money Market Funds invest in short-term debt instruments issued by the government, banks and corporations. They are known for their stability and can be a good option for capital preservation

  • Short-Term Debt Funds

These funds have a slightly longer investment horizon and may include corporate bonds and debentures. They offer better returns than Liquid and Ultra Short-Term Funds but come with slightly higher risks

  • Fixed Maturity Plans (FMPs)

FMPs have a predefined maturity date making them suitable for investors with specific investment horizons. They invest in fixed-income securities and aim to provide predictable returns.

How to invest in short-term Mutual Funds

Investing in short-term Mutual Funds is simple. Here is a step-by-step guide:

  • Choose a Mutual Fund provider

Select a reputable Mutual Fund provider or Asset Management Company (AMC). Research about the short-term fund options offered

  • Complete KYC

Complete the Know Your Customer (KYC) process by submitting your identity and address proofs along with a passport-size photograph. You can do this online or at the nearest branch of the AMC

  • Select a fund

Once the KYC is complete, choose the short-term Mutual Fund that aligns with your investment goals and risk tolerance

  • Invest

Fill out the application form provided by the AMC and invest the desired amount. You can invest a lumpsum amount or set up a Systematic Investment Plan (SIP) for regular investments 

  • Monitor your investment

Keep an eye on the performance of your short-term Mutual Fund. Most AMCs provide online portals or apps for easy tracking Redeem when needed When you need funds, you can redeem your investment partially or fully, depending on your requirements. The AMC will credit the redemption amount to your registered bank account.


Short-term Mutual Funds are an excellent choice for investors seeking a safe and flexible way to grow their money over a short time frame. These funds offer a balance between security and returns, making them suitable for various financial goals such as building an emergency fund, saving for down payment on a house etc. By understanding how short-term Mutual Funds work and choosing the right fund for your needs, you can make the most of your investments./p>

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