Best Mutual Funds for Short Term Investments - Low Risk Mutual Funds in India

These mutual funds usually invest in low-risk securities such as money market instruments and treasury bills. Mutual funds designed for short term financial goals prioritise capital preservation with minimal exposure to market volatility, while offering investors the flexibility to easily access funds. Due to these features such funds serve as a favourable option for parking surplus capital and meeting short term goals. They are also suitable for retirees and other conservative investors aiming for stable returns.

While equity mutual funds are suitable investment options for wealth creation in the long run, they can be highly volatile in the short term. These funds can even witness erosion in the value of capital in the interim. Therefore, for short term goals that are less than 3 years away, investors should prefer following a conservative approach and focus on preserving wealth.

In this article explore the best mutual funds for the short term carrying low risk:

Which are the best mutual funds for short term investments?

1) Liquid Fund

Liquid Funds are debt mutual funds that invest in debt and money market instruments such as certificates of deposit (CDs), commercial papers (CPs), and treasury bills, etc. carrying maturity of up to 91 days. The core investment objective of a Liquid Fund is capital preservation and ensuring liquidity through judicious investments in the money market and debt instruments. Given the type of securities Liquid Funds hold, they usually entail low interest rate risk and credit risk. Moreover, numerous mutual fund houses offer 'instant access facility' for investors in Liquid Funds, allowing them to redeem up to 90% of their units (capped at Rs 50,000) within a few hours or even minutes of placing the redemption request.

[Read: 3 Best Liquid Funds for 2025 - Top Liquid Mutual Funds for 2025]

2) Ultra Short Duration Fund

Ultra Short Duration Funds come next to liquid funds in terms of risk-return potential and invest in relatively higher-maturity debt papers and money market instruments. These funds are mandated to invest in debt & money market instruments such that the Macaulay Duration of the portfolio is between 3 to 6 months. Ultra Short Duration Funds invest in a range of credit instruments such as CDs, CPs, G-secs, and money market instruments, amongst others. But as the duration is slightly higher, the risk is slightly more as well compared to a Liquid Fund. Therefore, you need to keep an investment time horizon of around 6 months or more when considering Ultra-Short Duration Funds.

3) Corporate Bond Fund

Corporate Bond Funds are debt mutual funds that are mandated to invest at least 80% of their assets in bonds issued by corporates carrying highest credit rating (AA+ and above). High quality bonds are highly liquid in the secondary market, ensuring a high degree of safety for investors. While there is no restriction on the duration of these funds, most schemes in the category have an average maturity profile ranging between 1 to 3 years, making them less sensitive to interest rate fluctuations. These funds have the potential to perform well in stable and falling interest rate conditions. Thus, these funds are suitable for investors having an investment horizon of around 2-3 years.

4) Banking & PSU Debt Fund

Banking & PSU Debt Funds are required to invest at least 80% of their assets in top-rated corporate debt instruments issued by banks, Public Sector Undertakings (PSUs), and Public Financial Institutions (PFIs). In other words, these funds mainly comprise government and quasi-government securities, along with some exposure to top names in the banking industry, making them highly liquid and less prone to credit risk. Generally, Banking & PSU Debt Funds maintain duration between 2 to 5 years, resulting in moderate sensitivity to interest rate fluctuations. However, these funds can benefit from regular coupon payments and may implement a partial accrual strategy to help reduce volatility during periods of rising rates.

[Read: HYPERLINK "https://www.personalfn.com/dwl/Mutual-Funds/3-best-banking-and-psu-debt-funds-for-2025"3 Best Banking & PSU Debt Funds for 2025]

5) Arbitrage Fund

Arbitrage Funds are hybrid mutual funds that aim to exploit the price differential in two different segments (spot and futures or cash and derivatives) of the equity market. These funds buy stocks in the spot market and sell in the future market simultaneously thereby making gains with the price differential (called the spread). Such dual position ensures that the investment is relatively insulated from the price fluctuations in the market, minimising risk. Unlike pure equity funds, returns of Arbitrage Funds are not dependent on market direction but on the availability of arbitrage opportunities. However, for taxation purposes, Arbitrage Funds are treated as equity funds.

What are the tax implication of investing in mutual funds for short term?

With effect from April 01, 2023, capital gains arising on redemption of all debt funds, including Liquid Funds, whether short-term (a holding period of less than 36 months) or long-term (a holding period of 36 months and above), are taxed as per investors' tax slab.

On the other hand, with effect from July 23, 2024, capital gains on equity-oriented funds such as Arbitrage Funds are taxed at 20% if the units are redeemed within one year. Meanwhile, long-term capital gains (holding period of more than a year) are taxed at 12.5%, if the gains exceed Rs 1.25 lakh in a financial year.

Final thoughts

Investors with a short-term investment horizon have an array of low-risk mutual funds to choose from. However, one must remember that these funds should not be construed as risk-free investments. Additionally, it is important to note that each of these options have different risk-return profiles. Therefore, investors must carefully evaluate these options and choose the one that best aligns with their investment objective.

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Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The securities quoted are for illustration only and are not recommendatory.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.