Mutual funds are generally deemed long-term investments, but they have products that are custom-made for short-term investments as well. As such, there is no mandatory lock-in period for mutual funds except for ELSS. The flexibility aspect makes mutual funds attractive for investors as they can quickly make their entries and exits based on market fluctuations. Here, we will discuss five mutual fund categories suitable for a year of investment which are also some of the best investment plans.
1. Liquid funds
If you ask which mutual fund is best for a one-year investment, the first thing that will come up are the liquid funds. The AUM or assets under management for liquid funds in India is 4.3 trillion rupees as of January 2024. Liquid funds are basically debt funds or money market investments that deal with commercial papers, certificate deposits, treasury bills, government securities, etc. These funds mature within 91 days and the net asset value of them is calculated for 365 days. With their 24-hour withdrawal option, liquid funds offer a high degree of liquidity to the investors, making them one of the safest investment plans.
Short-term investment in liquid funds is profitable. However, your best investment plan for liquid funds should take into account the following factors:
- Evaluation of your goal: Having a clear-cut goal is vital for any investment. If you are opting for a short-term investment in liquid funds, you know that it will fetch only minimal returns. Consider investing only if its return prospects suit your financial goals.
- Risk-taking ability: If your risk-taking capacity is low, liquid funds are surely best for you. But you must know that low-risk funds also provide lower returns in comparison to other investments.
- Taxation: The taxation on liquid funds is calculated according to the income tax slab rate of the investor. Therefore, if the investor is within the 30% bracket, his/her short-term capital gains will also be taxed at the rate of 30%. For units held for more than 3 years, long-term capital gains tax will apply at the rate of 20%.
- Experience of the fund manager: The fund manager’s industry experience, age, expertise, and track record matter when it comes to making profitable liquid investments. Check them in the factsheet before investing.
2. Ultra-Short Duration Funds
Another option among mutual funds for one year is the ultra-short duration funds. They also deal with debt and money market investments just like liquid funds. But the main difference lies in the tenure. Ultra short-duration funds deal with the Macaulay Duration scheme of 3 to 6 months. The interest-yielding curve of these funds is sloping. This means the longer you invest, the higher the returns you will enjoy. Therefore, scope for making profit is greater here if you opt for a longer duration of investment. If you hold ultra-short-duration funds for less than 36 months, capital gains from the sale of units will be added to your income and taxed per your slab rate. If you made the investment before March 31, 2023, it will be considered long-term capital gains and taxed at 20% with indexation benefits.
Some of the factors you need to consider while making your best investment plan with ultra-short-duration funds are:
- Investment tenure: If your tenure of investment is shorter, such as below 3 months, then investing in liquid funds is more profitable than ultra-short duration funds. However, if you are aiming for a 6-month or 12-month duration, these funds are preferable.Â
- Low expense ratio: The return ratio of such low-duration funds is naturally lower than that of the high-duration ones. Therefore, your investment plan needs to focus on funds with a lower expense ratio. Otherwise, the higher-expense funds will eat up a significant portion of your returns.
- High credit quality: Though the interest rate risk of ultra-short duration funds is low, you cannot ignore credit risks. Interest rate fluctuations and credit risk can significantly reduce your invested capital. Therefore, invest in AAA-rated papers with high credit quality to ensure security.
3. Low Duration Funds
Low-duration funds are also a type of debt fund which has a tenure between 6 to 12 months. The 6+ months holding period provides ample opportunities for growth and thus offers the best returns. Investors can use this investment to get a surplus of money from their annual bonuses or property sales. The average return rate of low-duration funds ranges between 6.5% to 8.5% which is comparatively higher than the other options discussed. Thus, these funds can be a steady source of income with attractive returns and scope for dividend payouts. Investors looking for better returns with a mindset to invest their money for 6 to 12 months can choose low-duration funds as their best investment plan in India in 2024.
However, investors would do well to keep the following in mind while investing in low-duration funds:
- Taxation: Returns from low-duration mutual funds incur taxes, both short-term capital gains and long-term capital gains for holding period above three years, per the investor’s income tax slab. So, choose low-duration funds only if you are ready to pay the taxes.
- Expense ratio: Usually the expense ratio of low-duration funds is low. Yet, it becomes vital for you to consider this factor, as the expense ratio can eat into your capital return.
- Historical returns: You will also need to consider the historical returns from your chosen low-duration fund to get a grip on roughly what to expect.
4. Money Market Funds
Money market funds are another profitable short-term mutual fund investment option. Here, the investors invest in highly liquid near-term instruments including cash, government securities, commercial papers, certificates of deposits, bonds, high-credit-ratings, short-term maturities, etc. They provide high liquidity with minimum risks. The tenure of money market funds is usually between 3 to 6 months.
Investments in money market funds comprising high-value financial instruments make them relatively safer. The return from these instruments depends on the interest rates of the applicable market. Since the face value of these financial instruments is high, they are sold at a considerable price, levying the investor with a fixed significant return up to maturity. Most importantly, RBI directly controls and regulates the operations of the money market in India.
However, you need to consider the fact that the returns from this relatively low-risk short-term investment option may not be according to your expectations. The asset may not yield in line with the inflation rate.
5. Floater funds
Here, investors invest in corporate bonds with fluctuating rates of interest. These funds use up to 65% of their money in the floating rate debt. The floater funds are completely open-ended. Investors can enter and exit from them without any restrictions. Floater funds have both short-term and long-term funds. Short-term with less than one year tenure comprises treasury bills and certificates of deposits, while long-term funds invest in government bonds, corporate bonds, and debentures. The interest rates of these floater funds are set regularly. So, the return from floater funds is not fixed or predictable like those of the short-term mutual fund options you see above.
If you wonder why you need to invest in floater funds, here are some of the reasons.
- Substantial returns: In floater funds, the principal amount invested remains secure. Moreover, moving in accordance with market fluctuations enables these funds to cater to interest rate fluctuations. Therefore, investors here get a higher return in a rising market trend. This regular interest rate helps investors gain from market fluctuations through capital gains and periodical dividend yields.
- Low risks: These high-value debt instruments have relatively low risk. Floater fund investments have relatively less risk than equity instruments. Therefore, they are one of the favourable short-term mutual fund investment choices for investors with lower-risk aptitude.
Still you need to consider these factors while choosing floater funds as your best investment plan.
- Credit risk and default risk: If the issuer fails to pay the principal amount or its interest rates on time, it may directly lead to credit and default risks.
- Lack of availability and awareness: Floater funds are relatively less popular in the Indian market. Their availability is also limited.
- Lower returns: Return prospects of floating funds are also quite lower than those of income funds. The chances of getting higher returns become diminished when interest rates are falling or remain stable.
Conclusion
All of the above options of one-year investment plans in mutual funds have their unique advantages and risks. Therefore, the best investment plan for dealing with such short-term funds will need to take into account their return ratio, tenure, liquidity, taxation, and your risk tolerance. Do your research or consult with a financial advisor to ensure that your chosen short-term mutual fund investing option perfectly aligns with your financial goals and risk appetite.
