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Things to know before investing in Short-Term Income Funds.


Are you looking to invest in a fund that gives reasonable returns and high liquidity to achieve your short to medium-term financial goals? Short Term Income Funds may be best suited for you if you are looking to explore debt mutual funds within a moderate market risk.

What Are Short-Term Income Funds

These funds are open-ended debt mutual fund schemes which invest in debt and money market securities with a portfolio duration* of 1 to 3 years. They invest in debt securities such as corporate bonds, government securities, securitized debt, state development loans etc. These funds also invest in money market securities such as treasury bills, certificates of deposits, and commercial papers to ensure liquidity.

* The schemes’ portfolio duration is determined by Macaulay duration. The Macaulay duration calculates the weighted average time to receive the cash flows from a bond. It is the average of the duration of bonds within the portfolio, accounting for what percentage of the total portfolio each bond represents.

Why Duration Matters

Duration is important to investors because it acts as a guide for how sensitive a debt fund is to changes in interest rates. For most investors, the bond duration indicates how much the market price of a bond will change when its yield (i.e. its current rate of interest) changes. It is important to remember that yields and prices move in opposite directions, so as yields fall bond prices increase, thereby positively impacting funds returns and vice versa.

A broad thumb rule suggests when yields fall (or rise), a bond’s price will rise (or fall) by an amount which is approximately equal to the change in the yield, multiplied by the duration of the bond. So say, if the yield on a bond with a duration of five years falls (or rises) by 100 basis points (one per cent) the price of the bond may be expected to rise (or fall) by 5%, thereby positively (or negatively) impacting the fund performance.

So, the greater the duration, the higher the fund’s interest-rate risk and volatility in the fund’s value. The fund manager builds a portfolio that is well suited to the prevailing market conditions.

What Are the Advantages of Investing in Short-Term Income Funds?

  • Liquidity: Generally, short term funds invest in highly-rated money market and debt instruments which provide high liquidity to the portfolio.
  • Reasonable returns: These funds earn income through income accrual and capital gains. Income is generated from interest accrued on the fund’s debt holdings.
  • Active Fund Management: In addition to the income accrual, the fund can benefit from falling interest rates, resulting in potential capital gains for the funds and vice-versa. The fund manager actively manages duration to benefit from changing interest rates at the shorter end of the yield curve.
  • Higher Tax Efficiency: When you hold a debt fund for more than 36 months, the investors get indexation benefit, i.e. the purchase price is adjusted for inflation thereby reducing the capital gains and lower the tax outgo.

How Taxation Impacts Short-Term Income Funds

The capital gains taxation is dependent on how long you have held the units of the Short-Term Income Fund before selling or redeeming them.

  • Short-Term Capital Gains: If you’ve held a Short-Term Income Fund for up to 36 months, the capital gains you receive are regarded as Short-Term Capital Gains (STCG). These gains are taxed at the Income Tax slab rate applicable to you.
  • Long-Term Capital Gains: If you hold on to your Short-Term Income Fund for more than 36 months, the capital gains you earn are regarded as Long-Term Capital Gains (LTCG). As per the current tax laws, LTCG on debt mutual funds is taxed at a rate of 20% with indexation benefit, which means that before capital gains are calculated, the purchase price is adjusted for inflation. This helps to reduce the overall taxable capital gain amount

Who should invest in Short-Term Income Funds

It is the right choice for investors who –

  • Want to build a core debt portfolio for short to medium-term investment horizon.
  • Are looking towards reasonable returns and liquidity over short to medium term of 1 to 3 year.
  • Is seeking to do asset allocation across various asset classes and want to look at this fund for their debt asset allocation.

Disclaimer –

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.


This creative is under Investor Education and Awareness Initiative of UTI Mutual Fund. To know about the KYC documentary requirements and procedure for change of address, phone number, bank details, etc. please visit https://www.utimf.com/servicerequest/kyc. Please deal with only registered Mutual funds, details of which can be verified on the SEBI website under “Intermediaries/market Infrastructure Institutions”. For any queries, grievance redressal investor may reach out to the respective fund house. Additionally, investor may lodge a complaint at https://scores.gov.in , a portal provided by SEBI (SEBI Complaints redress system) if not satisfied with the response given by the fund house.



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