Investing in equity mutual funds is a good idea for long-term goals. Your investments get time to digest different types of factors, which they average out to achieve your goals in the long term. But if you want to invest in mutual funds for short-term goals, you can choose debt mutual funds. As equity is volatile over the short term, opting for short-term debt funds is recommended.
Reasons to select short-term debt funds
When you select an investment instrument for your short-term financial goals, there are three significant aspects on which you must concentrate. The first is capital safety, i.e., the fund you invest must not carry any unknown or speculative risks. The next factor is liquidity, meaning you must be able to liquidate your investments immediately whenever you require them. The third aspect is to consider the return potential against other investments.
To sum up, three significant factors include safety, instant accessibility, and return potential. Here’s where short-term debt funds can help. Short-term debt funds such as liquid funds, ultra-short duration funds, low-duration mutual funds, money market funds, and short-duration funds are the prudent options for making your short-term investment in mutual funds.
Capital safety
As short-term debt funds invest in fixed-income securities like commercial papers, corporate bonds, certificates of deposit, T-bills, government securities, etc., they can generate better returns than traditional investment instruments. So, consider short-term debt funds if you are eyeing something safe with higher returns.
Liquidity
The next consideration in choosing short-term debt funds for your short-term goals is liquidity, i.e., the speed and ease at which you can liquidate your investments. As a short-duration goal spans up to three years, you would require an investment instrument that allows you to liquidate your investments as per your short-term goals’ time horizon. Under the short-term debt fund category, funds like overnight and liquid funds permit instant redemption.
There are various debt fund options available depending on your desired investment duration. Overnight funds are suitable for one day, liquid funds for upto 3 months, ultra-short duration funds for 3-6 months, low duration funds for 6-12 months and short duration funds for 1-3 years.
Return potential
The last selection criterion is return potential. Besides capital preservation, you also look for satisfactory returns when you invest your money. As short-term debt mutual funds invest a significant corpus of it in market-linked fixed-income instruments, you can gain a higher return than a savings account and fixed deposit if you select the debt scheme well.
As short-term financial goals aim to accumulate a corpus with reasonable returns, short-term debt mutual funds may be a prudent choice. It is because debt mutual funds invest in fixed-income instruments like corporate bonds, treasury bills, government securities, etc. Such fixed-income instruments generate interest at predetermined intervals and face value on maturity.
Note that such instruments’ yields are generally higher than fixed deposit rates of the same maturities. Besides providing satisfactory returns, debt mutual funds offer capital preservation and liquidity features besides providing fair returns.
