We save and invest to achieve various financial goals during our lifetime. While many of them are far in the future, such as ensuring sufficient retirement savings, saving for your child’s higher education, or buying your dream home, we might want to achieve some of our goals within the next year. When selecting a Short Term Fund for short-term goals, you need to consider two essential aspects.
Firstly, minimise the risk to the capital invested; secondly, your investments must be easily accessible. Let us look at the selection criteria:
Potentially low risk to invested capital
Every investment carries some risk, and one of the key goals is to minimise risk while maximising returns. When investing in the short term, you must choose investments that put your capital at the lowest possible risk. With an investment tenure of up to one year, you might not get sufficient time to recover from any losses that might occur.
Easy access to investments
When making investments for short-term goals, you must be able to invest and withdraw funds easily. So, investments with a lock-in period are ill-suited for short-term investment goals. The best way to invest in Short-Term Funds is to follow the Lumpsum Investment or Systematic Investment Plan mode according to your financial status and availability. For example, while Fixed Deposits score high on safety, they come with a lock-in.
While you can break your FD prematurely, it would result in penalties eating into your returns, causing you to fall short of your investment goal. Meanwhile, investing in Short-Term Mutual Funds allow you to withdraw your investments without paying much capital gain.
Best funds for short-term investments
When choosing the best Short-Term Fund, not all categories qualify. For example, Equity-oriented Mutual Funds are not ideal if you plan to redeem the investment within a year. Debt Funds put you at a lower risk in this case and are better for accomplishing short-term goals. Some recommendations for short-term investments include:
Liquid Funds
These invest in debt instruments with a maturity of up to 91 days, such as Treasury Bills, Certificates of Deposits, Government Securities, etc. Due to the short maturity period, the market price of these securities remains relatively stable. You can expect potentially low volatility and consistency of returns from a Liquid Fund.
Ultra-Short Funds
Due to their longer maturity, Ultra-Short Duration Funds carry a slightly higher risk. However, the potential to offer higher returns than Liquid Funds makes these debt schemes a suitable alternative if you want to invest for at least six months.
Money Market Funds
These invest in money market securities such as Commercial Papers, Certificate of Deposit, Treasury Bills, etc., with a maturity of up to one year. Money Market Funds can be more volatile in the short term than Liquid and Ultra-Short Funds. Before investing in these instruments, ensure they align with your objectives.
