Investing in Mutual Funds for Short-Term Financial Goals

What is a short-term financial goal?

Going day to day without any financial goals in place can cause you to spend too much, then come up short when you need money for unexpected bills and have to rely on high interest credit cards. Short-term financial goals are generally things you want to achieve within roughly one to three years.

Quick Insights 

• Short-term financial goals: Achieve within a few years, like paying off debt or saving for a trip. 

• Emergency fund: Vital for unexpected expenses, preventing reliance on high-interest credit. 

• Track spending: Prioritise expenses, create a realistic budget for short-term goals. 

• Credit card debt: Paying it down is crucial to avoid hindering progress on other goals. 

Picking the Right Short-Term Investments: Your Guide to Selecting Investment Products:

Selecting Short-Term Investments: Focus on Safety, Liquidity, and Returns. Ensure your investment is secure, easily accessible, and offers competitive returns compared to other options.

Factor 1 – Safety First in Investments: 

Consider the Risk Factor. Whether it’s mutual funds or banks, every investment involves some risk. Understand the practicality and extent of the risk before making your investment choice.For the safest options, go for a bank savings account or fixed deposit. In mutual funds, choose an overnight or liquid fund for maximum safety.

Factor 2 – Liquidity Of Investments:

Consider how quickly you can access your money when selecting an investment. A bank savings account is the fastest option, allowing online transfers, ATM withdrawals, and more. Another quick option is a Liquid Fund, a type of Debt Fund that offers instant redemption up to a specific limit. However, keep in mind that redeeming units in other Debt Funds and receiving the money in your bank account typically takes 1-2 business days.

Factor 3 – Return Potential Of Investment Products

you need to be extra careful when anchoring on returns as a selection criterion because it’s pretty likely to get blindsided by it. Never forget that safety and liquidity have a higher role to play than returns while evaluating a debt fund. Moreover, don’t chase the best-performing fund as, more often than not, the funds that deliver the highest returns also take in the highest risk.And lastly, when evaluating returns of Debt Funds, always look at post-tax returns.

Therefore, these 3 aspects – safety, liquidity, and return ability – lay the foundation for our selection structure. Let’s now get into specifics on how one can set up their short-term investments.

Setting Up Short Term Investments: A Step-by-Step Guide

• Write Down Goals:
  • Enhances decision-making.
  • Provides a clear vision of required investments.
• Align Goals with Financial Products:
  • Important and immediate goals: Savings account, fixed deposit, overnight funds, or liquid funds.
  • Less urgent or future goals: Ultra short term fund, money market fund, low duration fund, or Arbitrage Fund (suitable for 6-18 months).
• Selecting Funds – The Easy Way:
  • Call to Clients Growth Manager – 8100600300.
• Selecting Funds – The Complex Way:
  • Incorporate manual checks and rules.
  • Check modified duration, average maturity, and YTM.
  • Prefer lower modified duration for less sensitivity to interest rate movements.
  • Ensure the average maturity aligns with the category’s average.
  • Aim for a YTM close to the category’s average, avoiding excessive risk for short-term goals.
• Remember:
  • Higher YTM may indicate higher risk, not suitable for short-term goals.
  • Conduct additional research for a comprehensive assessment.

Congratulations! You have learned about Investing in Mutual Funds for Short-Term Financial Goals.