Short Term Funds Are Ideal for Momentarily Parking Money
For every investor, the purpose behind investing is generally to achieve capital appreciation over the long term. However, there are times when an individual wish to park their money in such an investment scheme from where they can easily liquidate in case of an exigency. Now one might wonder “Why not to park your money in the savings account?” Although it is safe to park excess money in your savings account, the interest that you earn by keeping the money in the bank is close to 4 or 5 percent, sometimes even lower. Why do you want the banks to keep your money and benefit from it when you are getting nothing in return?
Mutual fund schemes have become popular among retail investors because of the kind of returns they have offered in the past. They are far more flexible than conservative schemes and if you exclude a tax saving scheme like ELSS, an investor can redeem his / her mutual fund units on any working day. Mutual funds aim at generating capital appreciation by investing in a diversified portfolio of securities consisting of company stocks, commercial papers, G-sec etc. Which asset class or money market instrument a mutual fund will invest may totally depend on the nature of the scheme, its investment objective and its underlying benchmark which it aims at outperforming in the long run. Mutual fund investors are allotted units in quantum with the investment amount and depending on the fund’s existing NAV (net asset value).
Equity funds offer decent capital gains however, they are a high risk investment. To make the most out of an equity mutual fund scheme, one needs to remain invested for a minimum period of 5 to 10 years. However, if you want to park your money for the short term and also earn some decent capital gains with minimum investment risk, you can consider investing a short term fund.
What are short term funds?
A short term fund is an open ended debt mutual fund scheme invests in fixed income securities and debt instruments such that the Macaulay duration of the portfolio is between 1 year to 3 years. Short term schemes are considered far more less volatile than equity mutual funds whose are exposed to market volatility all the time.
Add a short term fund to your investment portfolio
Debt fund are known to offer the much needed cushion for one’s mutual fund portfolio. When the equity markets are underperforming, investments in debt might be able to even out your portfolio’s losses. Also, if you have recently inherited surplus money or have a large capital sitting idle which you are going to utilize in the near future, you can invest this money in a short term scheme. The beauty about short term funds is that they offer immediate withdrawal option which means in case of an exigency or any financial emergency, an investor can easily redeem their short term fund units. One does not need to liquidate their entire short term fund portfolio. You can only liquidate the money that you need while the remaining amount continues to earn stable returns.
Investors can even start a monthly SIP in a short term scheme of their choice. A Systematic Investment Plan is an easy and convenient way of investing in any mutual fund scheme. If you are a KYC compliant individual, you can start investing in short term funds from the comfort of your home using a laptop or a smartphone with a decent internet connection. One can even refer to SIP calculator to get an estimate on their capital gains from investments in short term funds.
A short term fund might be ideal for park your money for the short term or to build an emergency fund, but it is better to understand your risk appetite and your financial goals before investing.