In this video by Aditya Birla Sunlife Insurance, you will learn how to invest when you have less time on your hand to achieve your financial short term goals. It might be just a few months, but if you want to know how you can get great returns in a safe way, watch this video completely.
Generally in personal finance, we refer to investments as long-term plans. However, let’s not forget that short-term goals exist as well. Be it a phone, a vacation, or a bike – they all are short-term goals you might have. A financial plan is also required to achieve them. Let’s examine what types of investment instruments are suitable for short-term goals.
Consider only those investment avenues that make the best use of your fixed income. These include debt mutual funds, fixed deposits, government and private bonds, NCDs, and various post office schemes.
The goal is to minimize volatility and earn greater returns that outpace inflation instead of simply letting your money sit in a bank account.
Why debt mutual funds for short-term goals?
Let’s say you are a money lender. Would you lend to people you don’t trust? So how do you know if the organizations you lend to are trustworthy? That is the main challenge while investing in fixed income. The only option is to trust your bank (yes, even a savings bank account means that you are giving them money) or the government.
When you invest in fixed income, you’re lending your money to an organization directly or indirectly. You’re lending to the government if you invest in government bonds or G-secs. You’re lending to corporate entities if you invest in NCDs or commercial paper. In addition to the trust factor, there are other challenges.
Typically, debts must be repaid only when they are due. Getting your money whenever you want may not be possible, even with interest payments. Also, interest rates fluctuate from time to time. This has a significant bearing on the price of debt instruments. In other words, investing in fixed income can be more complex than in equity.
This is where debt mutual funds step in to solve issues like trust, liquidity, and duration. They mainly invest in the debt of entities that are considered reliable with the ability to withdraw and invest as and when required. These funds also generate high returns because of the lack of penalties on redemption before maturity, which is applicable to equity funds. They also provide returns that make sense for short-term objectives (6%-7% for liquid funds and 8%-8.5% for short-term debt funds).
What kind of debt mutual funds is suitable for most investors?
Investing in debt mutual funds can provide you with fixed-income investments, depending on the fund’s quality, duration, and interest. However, for most financial goals that are due within the next five years or less, liquid funds and short-duration debt funds are usually the best options since they invest in high-quality debt.
A well-rounded investment portfolio should include both to achieve stability and returns while meeting specific financial goals. Let’s say you are planning for a vacation in the next two years. A suitable liquid fund is ideal for that particular goal.
Tax-efficient returns are also offered by debt mutual funds, especially if you hold them for longer than three years. This is quite useful if you plan to invest a considerable amount. For short-term goals, choose high-quality, short-duration debt funds with high liquidity.
The addition of debt mutual funds such as corporate bonds can be an extra layer of stability when building a portfolio that withstands market fluctuations and generates returns suited to your goals.
Final Word
The best of both worlds can be found in debt funds – they aim to offer investors a better return than fixed deposits while safely wading through turbulent market conditions.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
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