Is a Mutual Fund Good for a Short Term Investment?

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One issue a lot of people have is – ‘less time.’ We want to do everything in a shorter span than given. It’s more like reaching the destination faster, a shorter route to work, a faster method to study, and much more. Well, your financial goals could also be shorter and based on your objectives. For instance, it could be getting a TV in the time span of two months or so. So, it’s good to have viable short-term investment options that you can use.

This piece will let you know that you don’t always have to be invested for the long term or into traditional FDs and schemes that go on for years and years together. There are Mutual Funds that match your short term financial objectives, and we’ll help you know them. So, let’s get to the best short-term investment vehicle.

Is a Mutual Fund Good for a Short Term Investment
Is a Mutual Fund Good for a Short Term Investment

Are There Short Term Mutual Funds?

Debt Mutual funds are short term Mutual funds, and they are open-ended debt schemes that you can invest in for the short term. If you are looking for an investment basket for a month to a couple of years, you can choose these funds. They let you be invested in them for shorter periods when compared to other mutual funds.

You Need to Know

SEBI does not explicitly mention short term Mutual funds – this means there is no such thing as a short term Mutual fund! Now, don’t be shocked – you are probably thinking we’ve explained short term Mutual funds above and how there can be no such thing. Well, technically, rather than being in a category, short term funds are actually the investment made in for the period that is less than 5 years. They are not officially called this, but their range is typically for the short term.

So basically, there is no specific category. But, we can say it’s funds that let you invest for less than 5 years. You also have to know – debt Mutual funds are the best choice when you are looking for short term funds. They can be short term funds and ultra-short terms funds, based on your time horizon.

Let’s look at this with an example.

Your financial goal is to buy yourself a new laptop in 12 months, but with FDs or other schemes, you’d have to keep your money locked in for years together. Rather, you invest in some mutual fund, say – Parag Parikh mutual fund. For instance, you invest Rs. 26,000 in the fund, and after a year, you’ve earned 12% (this is just an example, so don’t take it literally). It means you’ve made over Rs. 30,000. Isn’t that a great deal? Suits your time horizon, and you’ve let your finances grow.

Who Should Be Investing in Debt Funds?

These funds are the most suitable to the investors who have a short time horizon on their plan – anything that is over a month. This fund is much better than a savings account to park your surplus. They can give you a higher return than bank deposits, with added liquidity.

If you are someone who does not have a high-risk appetite, this can be for you. These funds are risk-averse because of their short term nature and underlying securities.

What Risks do Short Term Mutual Funds Carry?

Short term funds are debt funds, and they are attached with the following risks:

A) Risk of Credit: The possibility of the issuers of the underlying securities notwithstanding by their word to give regular interest or the principal at maturity.

B) Risk of Liquidity: There is a chance that the fund manager wouldn’t be able to sell the underlying instruments without resulting in a major loss.

C) Interest Rate Risk: There could be a probability of the interests offered by the issuer, as it could fluctuate because of economic and geographical reasons.

Though these risks are associated with these funds, the benefits can play by your side.

Advantages of Investing in Short Term Mutual Funds

After looking at these benefits, you’d probably overlook traditional investments. So, here we go.

You Will Have Stable Income

Almost all short term mutual funds are debt funds and are classified on the basis of holding period. Debt funds are reliable, and putting your money in them can be a steady source of income because it invests in government securities, corporate bonds, and more.

You Can Effortlessly Diversify your Portfolio

You do not have to put a lot under the radar. Debt funds aren’t like equity funds. Equity funds take a long time. But with debt funds, they are low risk, and you can make money within 3 years.

You Can Attain your Financial Goals

Your financial goals could have a time horizon of a year or three with these funds, it’s flexible enough for you. Most investment and savings schemes are in it for more than 5 years, but with debt funds, you can be invested for a shorter period.

Well, now you’ve got your answer. Short term mutual funds are profitable. Also, they play by your rules. You can be invested in schemes with high liquidity and more interest rates than FDs and more.

Conclusion

The minimum amount you can invest in debt funds differs from fund to fund. So, if you’ve been thinking about the liquidity of investing in mutual funds – with the short term funds you do not have to worry about that.

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