How to Meet Your Short-Term Needs with Mutual Funds?

Planning for short-term needs is different from long-term goals. When you invest for a long-term, time is at your side, and thus, you can look for capital appreciation and take risks with your money. However, for short-term goals, your objective should be more on capital safety over growth. Further, ensuring that money is available to you at the time of need is also necessary when it comes to investing for short duration.

While looking for short-term investment avenues, most people depend on traditional investment options like a recurring deposit or bank fixed deposit. As these investments do not fluctuate and give fixed returns, they enjoy high popularity.

However, taxation is a big blow to short-term investments as a major portion of short-term gains get taxed as per income tax slab in which you fall. Therefore, it is essential to be extra cautious while choosing the short-term investment options.

To meet short-term needs, you can invest in mutual funds, which have various categories for short-term investors. These investment options not only give good returns, but also ensure that money is available to you at the right time.

However, you need to plan well to choose the right scheme. Let’s understand how you can achieve your short-term goals with the help of mutual fund investments:

  1. Decide Your Time-Horizon: Equity mutual fund schemes are apt to meet long-term goals like a child’s education, marriage, retirement, etc. But for short-term, you need to define your time-frame clearly. This is because, with mutual fund investments, the risk rewards vary as per the time-limit.

Before choosing any scheme, define a timeline for your goals. For instance, you may want to create an emergency fund that should be accessible to you when an emergency strikes, or you may want to accumulate money to fund your foreign trip that you might take after nine months. So, make sure to decide the time-frame of investments clearly.

  1. Pick Apt Mutual Fund Schemes: Once you have defined the time-frame, the next step is to choose the correct mutual fund schemes. For very short-term goals and emergency fund, you can invest in liquid funds. A liquid fund is a good option for short time-frame of six months to one year.

Liquid funds are simply debt funds that invest your money in short-term market instruments, like government securities, treasury bills, etc. They are less risky as well as less volatile.

If your goal is three years away, you can opt for income fund or dynamic bonds as well. An income fund is that fund that mainly seeks current income instead of growth of capital.

Choose schemes that have a good long-term track record. Also, before investing, check the expense ratio of the scheme, which is the fees levied by the investment company for managing the funds of investors. Further, check exit loading charges and make sure they do not eat away your returns.

Note, liquid funds do not bear exit loads, but income funds have.

  1. Start Saving on a Regular Basis: Irrespective of what your monthly earning is, save a certain portion of it on a regular basis. For instance, if you want to build an emergency fund, it will not happen overnight. Your monthly savings can help you build an emergency fund in one or two-year duration, so make sure you save regularly.
  1. Consider Returns: Mutual funds are market-oriented investment options and return on each scheme will depend on the portfolio in which you have invested.

So, while investing, consider the interest rate of instruments which will help you understand what returns you should expect.

Important Tip

You can invest in mutual funds through Systematic investment plan (SIP). It is a viable tool that works well for your short-term needs as well. With SIP, you can make regular investments without timing your entry in the market. Just set up SIPs in a mutual fund scheme through auto debit facility so that the amount gets debited on a regular basis. It can help you save regularly to build funds for meeting short-term requirements.

While making SIP investments, make sure to spread your investment dates. Fund houses have specific dates on which you can make SIP investments. Therefore, if you are starting a SIP through the same funds or different funds for your goals, make sure to choose different SIP dates. In this way, you can ensure that some cash is always there in your saving account and the entire money doesn’t go away at one go. But the big benefit is that you can lower the impact of market volatility to a great extent. When the money is invested on different dates, it lowers the risk of market volatility.

Wrapping Up

Accomplishing short-term goals need well-devised planning. Mutual funds, especially liquid funds, enjoy an edge over other traditional deposits with the probability of generating high returns. So, invest some amount in fixed income mutual fund instruments, and generate a corpus to meet short-term needs.

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