OWhen chalking out a prudent financial roadmap, one may have several goals. It is always desirable to divide such financial goals into short-term and long-term. Long-term goals may include retirement planning, children's education, marriage, etc. Short-term goals may consist of maintaining an emergency fund, house renovation in the next six months, family vacation, vehicle purchase, etc. While equities are considered for long-term financial purposes, choosing the right investment option for short-term financial goals may be tricky for some investors.
Mutual funds provide a variety of investment options to investors. Considering the wide range of mutual fund schemes available across asset classes, scheme duration, etc., investors may select a suitable mutual fund for their short-term goals. They can choose the scheme that best suits their risk appetite, financial goals and investment horizon.
When it comes to mutual funds for short-term goals, one may choose mutual fund schemes with relatively lower investment risk. Here are a few tips on how investors can plan short-term goals with mutual funds:
Maintaining an emergency fund corpus
While one may create an emergency fund over time, one can't say when it would actually be required. It is supposed to take care of potential financial contingencies. As it could be needed in a short period of time, investors may not desire high volatility in such a fund corpus. They may like to invest in the overnight and liquid funds, investing respectively in securities with one-day maturity and maturity of up to 91 days only. As such, the interest rate and credit rate risk are almost insignificant for the investors in such funds.
Such corpus can thus be invested in overnight or liquid funds, which carry minimal investment risk due to predominant investments in sovereign and money market securities.
Planned short-term goals within a year
One may plan family vacations every year and may like to save and invest towards such goals consistently. Since the timing of such goals is broadly defined, one can plan the investments accordingly.
In such goals, the fundamental objective of conceiving a financial plan is to make regular investments in reasonably safe investments so that the ultimate goal may be achieved with consistent savings. Further, the reasonable returns generated by the investments also add to the investment corpus to some extent.
Considering the short-term duration, investors may opt for debt funds , especially money market funds. This is because such funds stay significantly insulated from interest rate risk and credit risk. As such, investors may mitigate the volatility arising out of market movements.
Short-term goals with an investment horizon of 2-3 years
While debt schemes are preferable for most short-term goals, a relatively extended investment horizon may widen the investment options available. A longer time frame makes it easier to assign a partial allocation to equity schemes for the potential of better returns. Even while equities may be considered volatile over the short-term, one may allocate investments in equity funds with relatively lower investment risks like large-cap funds. This is because large-cap funds tend to be relatively stable compared to other categories of mutual funds, owing to the investment objective of investing predominantly in fundamentally strong companies.
Investors may benefit from investing through Systematic Investment Plans (SIPs) to combat market fluctuations and take steps to accumulate the desired fund corpus and achieve their financial goals systematically. Under a SIP, amounts are automatically deducted from the bank account and invested in a specified mutual fund scheme. As such, the investor continues to make investments towards their financial goals across market ups and downs instead of waiting for the right time to enter the market.
A SIP allows the investors to invest in chosen mutual fund schemes regularly. SIP investing inculcates a sense of financial discipline into investors' lives, as the investments are continued irrespective of market ups and downs. With consistent savings, investors may steadily accumulate and move towards their financial goals effortlessly.
In contrast, if the investors are left to make fresh investment decisions every month, it is highly likely that investing emotions and biases may result in procrastination for investment decisions. As such, a SIP is always desirable to achieve financial goals in a time-bound manner.
Similarly, one must also regularly review the investment portfolio to track such investments and take corrective actions if required. Such a portfolio review may be undertaken by investors themselves or with a financial advisor's help.
The primary objective of such an investment strategy is to accumulate an investment corpus while generating reasonable returns through investments. As such, it is also vital for investors to stay reasonable with their return expectations. This will help the investors to have a pleasant investment experience. Take the first step to start the journey of achieving short-term goals with mutual funds.
Further, one should have realistic return expectations while investing in the short term. Whatever mutual fund schemes the investor may choose, the idea is to build a portfolio best suiting the investment horizon prudently.
Disclaimer:
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
SIP is a feature offered for a disciplined investment of a certain amount on a pre-decided date in a specific mutual fund scheme, regularly over a period of time.