Launch · Investments
Posted on June 28, 2024
How do you pick funds for short-term investment?
Throughout Business life, we save and invest to reach different financial goals. Many of these goals are long-term, like upgrading technology to boost production efficiency or expanding into new markets.
However, not all financial goals are far off; some need to be met sooner, such as within the following year. These short-term goals, like saving for unexpected repair costs or avoiding high-interest short-term loans, also require careful planning.
Unfortunately, we often focus so much on long-term goals that we forget to plan for short-term ones. This can leave us without enough savings for immediate needs, leading to taking out loans and paying extra interest.
To avoid this, start investing early to quickly meet your short-term goals. This blog will cover key factors to consider when choosing funds for short-term goals and recommend some ideal types.
Selection criteria of funds for short-term investments
When you are selecting investment options for short-term goals, you need to consider a few essential aspecLet'set’s take a closer look at why these features are crucial when choosing short-term investments:
Past Performance: Evaluate fund'snd's past performance as an indicator of potential returns. However, past performance statistics may not guarantee accurate results. While short-term investment plans deliver smaller returns, you can choose them adequately to build a corpus.
Expense Ratios: Consider the expense ratio, generally a low expense ratio is considered ideal for short-term investment.
Risk Profiles: Evaluate the risk profile, considering factors like liquidity risk, credit risk, and interest rate risk for debt funds. When investing in the short term, you must choose investments that put your capital at the lowest possible risk.
Balancing Risk and Return: Aim to balance the risk and return of your investments by aligning them with your specific financial goals.
Liquidity Needs: When making investments for goals that have to be achieved within a short period, you must be able to make and withdraw your investments quickly. If you need the invested amount before maturity, an investment plan with high liquidity will be ideal.
Maturity Period: For short-term investment, a one-year or less maturity period is considered ideal.
Exit Load: An exit load is the fee charged to the investor when exiting or retrieving the units of the fund. The primary reason for levying an exit load is to discourage investors from backing out and pulling out their investments before the lock-in period ends. For short-term investments, funds with minimum or no exit loads are suitable.
Best types of funds for short-term investments
Two investment options stand out based on the low-risk criteria and easy access to funds: fixed deposits (FDs) and mutual funds. FDs are safe but not very flexible when you need to withdraw money. In contrast, mutual funds offer more flexibility.
However, not all mutual funds are suitable for short-term investments. For instance, equity mutual funds are not ideal if you plan to withdraw your money within a year because they can be very volatile in the short term, risking your investment. Debt mutual funds, on the other hand, generally have lower risk compared to equity funds and are better suited for short-term investment goals.
A few options of debt mutual funds for meeting your short-term investment goals are:
Liquid Funds: A Liquid Mutual Fund is a debt fund that invests in fixed-income instruments like commercial paper, government securities, treasury bills, etc., with a maturity of up to 91 days. Further, investors can get their withdrawals processed within 24 hours. These funds carry the lowest interest-rate risk in the debt funds category. There is usually no exit load on liquid funds.
Ultra Short Duration Funds: Ultra Short Duration Funds are also open-ended Debt Funds,, but these investments' maturity can range from 3 to 6 months. Additionally, similar to liquid funds, this category of debt funds also allows you to invest and redeem your investments quickly, ensuring that your short-term savings are easily accessible.
Money Market Funds: Money Market mutual funds are short-term debt funds. They invest in various money market instruments and endeavour to offer good returns over up to one year while maintaining high levels of liquidity. The average maturity of these funds is one year. The main features of these funds are high liquidity, ensured returns, and are regulated by RBI.
Conclusion
In summary, short-term investments are an intelligent choice if you're seeking low-risk, flexible options with reasonable returns. With your understanding of these investment plans and the factors to consider before investing, you can make well-informed decisions that match your financial objectives. To make such choices hassle-free, Infinity has a curated bundle that allows users to make intelligent investment choices. With Infinity, startups can make short-term investments to secure quick returns, making them suitable for investors who do not want to lock their capital for long periods.