Short Term Income Funds – Need to understand

POSTED BY Kapil ON May 14, 2012 3:31 pm COMMENTS (7)

Can someone explain the below in “easy-to-understand” language for a new investor? I am looking to invest around Rs1.5 lacs for 12 months period. Was wondering about other avenues than FDs and stumbled upon the following link, but could not understand this. I’ll be glad if you folks can help me out.
Url –
“What kind of funds should individuals invest in to manage better-than-FD returns, going forward?
It will depend on the investor’s risk appetite. If the investor is looking for a direct substitute for fixed deposits, then he should look at a slightly stable product such as short-term income funds.
If you have a high risk appetite, consider funds such as income funds, which manage their debt portfolios actively.”

Edit – I fall under 20% tax bracket.

7 replies on this article “Short Term Income Funds – Need to understand”

  1. Kapil says:

    It would be great if others can provide their opinion on physical buying of gold for a horizon of 1 year (approx).

    I have 1.5Lacs to invest for one year, and I am thinking of investing it in 3 equal parts – short term debt fund (dividend re-investment), FD and physical gold.

    1. Ramesh says:

      Gold (physical or otherwise) is a risky asset for a 1 year horizon.

  2. Nitin Verma says:

    If you are married or if you have kids, open a HUF account ( Hindu Undivided family) , so HUF becomes a separate identity who too njoys tax benefits according to the tax slabs. Park your funds in it and njoy the tax benefits.. declare that you are giving 1.5 L to ur sons HUF.. so that the entire income becomes tax free.

  3. Dear Kapil, the so called short term funds ‘ll be Superior than bank FDs due to better tax adjusted returns. Here I assume you ‘ll remain invested for at least 366 days or more to be eligible for LTCG applicability for you.

    For ease of calculation let’s assume both FD & short term funds are returning 10% return in 1Y time.

    Tax on bank FD ‘ll be 20%, your slab rate. So net earning ‘ll be 8% (again ignoring edu. cess for ease of calculation)

    Tax on LTCG from debt fund ‘ll be 10% with out indexation (you have the option to pay @ 20% after indexation if it’s more beneficial to you). so net earning ‘ll be 9% in this case.

    One important point to be noted in this discussion. You know even before investing, what ‘ll be your final return from bank FD but in case of debt fund, there is no such guarantee & actual return may be lower or higher than your expectations.



    1. Kapil Malhotra says:


      Thanks for your response.

      May I know that if I invest in short-term funds for 10 months (i.e. less than 366 days), how would the equation change?

      Also, I was thinking of, as an alternative, to buy physical gold of the given amount.

      What do you think would be the better choice then? Physical gold or short term funds? Investment horizon is of 9-12 months. Not sure as of now.

      Thanks in advance.

      1. Dear Kapil, if the holding period is less than 1Y for debt funds, the gains if any ‘ll be STCG & taxed at your slab rate which is 20% at present. so in that case, Debt funds are at par with bank FDs for less than 1 Y holding for taxation purpose.

        Gold for such short term, I have no view on Gold. Neither short term nor long term. In fact I’m not a Gold investor (Even my wife is not happy for this 😉 ).

        Please invest in Gold at your own risk.

        As the basic tax rate is same for that 9-10m period, investing in Dividend option of Debt fund is better option from taxation point as DDT ‘ll be around 14.5% only.



        1. Kapil says:

          Thanks Ashal for your response. You have been very helpful.

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