Are mutual funds an appropriate financial product to meet your short-term goals

Generally, mutual funds are considered investment products that help you meet long-term financial goals. This may be rather true, specifically in the case of equity mutual funds. Aside from equity mutual funds, there are other types of mutual funds, including hybrid funds and debt funds, that are designed to meet distinct financial objectives. In fact, there are various categories of debt funds to choose from, many of which are suitable financial products for achieving short-term goals. Based on your goals, risk tolerance, or investment horizon, there’s a mutual fund for everyone.

Short-term financial goals

Before you consider investing in mutual funds to accomplish short-term goals, it is important that you chalk out these goals for yourself. A short-term goal can be anything that you need money for in the immediate or near future. It could be one month, six months, or two years from now. Here are a few examples of short-term goals:
• Building an emergency fund: Having an emergency fund that is equal to the amount you require to meet your living expenses for six to 12 months is crucial and one of the first steps in financial planning. Debt mutual funds, such as liquid funds, can be a great place to park your emergency fund owing to the liquidity and capital protection they provide.

• Planning for a vacation: Whether it is a vacation in India or overseas, for celebrating your wedding anniversary or embarking on a solo journey, debt mutual funds may be a suitable avenue to save for it.

• Buying a high-value item: You may want to upgrade your phone or buy a home appliance such as a dishwasher. For such high-value items, planning and saving in advance are required, and funding such purchases may become easier with the help of debt funds.

• Saving for a certificate course: Constant skill and knowledge upgrades may be required to achieve career goals, and debt funds may help you save the amount you need to fund a short-term course or a semester at a university abroad for a certificate course.

Some other short-term financial goals can include home renovation, purchasing a car, and paying off high-interest debt.

Reasons why debt funds are suitable for short-term goals

While debt funds offer several benefits from diversification to professional management, here are the three reasons that make them suitable for fulfilling short-term goals:

1. Low-risk investment

Capital preservation is crucial when it comes to short-term goals. You want to save money regularly, know that your money is safe, and have some scope to earn returns on it. Debt funds allow for this. They tend to invest in fixed-income securities such as government bonds, debentures, and corporate bonds. These instruments are not as volatile as stocks, and they may offer better stability and security.

2. Predictable returns

Because short-term goals are about an immediate to short term future, it is important to know the approximate returns your investment may earn, and debt funds offer fairly predictable returns. The returns of their underlying securities, such as bonds, are linked to the prevailing interest rates, which in the short term, are relatively stable.

3. Liquidity

Another important aspect that makes debt funds a suitable option for short-term investors is their high liquidity. Quick access to your money without any penalties or restrictions is essential when using debt funds for goals such as building an emergency fund or saving for a vacation. You can easily buy and sell debt fund units as required.

Types of debt funds to choose for short-term goals

Here are some of the many types of debt funds that you could invest in to potentially fulfill your short-term financial goals:

• Liquid funds: These are short-duration funds with a portfolio maturity period of less than 91 days. They are suitable for parking your emergency funds.

• Ultra-short-duration funds: These funds invest in money-market instruments and debt securities, and their average portfolio maturity period is less than one year. If you have a slightly longer investment horizon, they could be more suitable than liquid funds.

• Short-duration funds: When you have one to three years to fulfill your goals, short-duration funds are more suitable. Note that while they provide higher returns than liquid funds or ultra-short-duration funds, they carry a higher interest rate risk.

Wrapping up

Once you identify your short-term goals, the time available to fulfill them, and the amount to be saved, you can select the appropriate type of debt fund and decide whether to make a lumpsum investment or opt for an systematic investment plan.

Source: Axismf Research

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