The definition of short-term is not really universal, but an investment period of 18 months or less definitely qualifies for short-term investment tenure.

Many a times, we have excess cash at our disposal and we know that we require funds only after a few days, weeks or months. In such a situation, we usually tend to park our excess funds in a savings bank account. But there are mutual funds which can be better alternative investment option and can be considered for better utilization of your funds in such short investment tenure.

 Broadly, there can be two investment goals

 1) To make your money grow

2)  To generate income at regular intervals.

The former typically requires investment in equity funds while the latter requires investment in debt or fixed income funds. Equity funds may be a less suitable option for regular income owing to the structure of the asset class which is highly volatile with a higher risk of capital erosion. The risk is more in the short term than in the long term.

Debt funds, on the other hand, are relatively less volatile with better consistency of returns. Hence they are more suitable for income at regular intervals and short term money requirements. As a general principal, if requirement of money is within period of 5 years and your requirement is not negotiable then it’s important to play safe and put your money in relatively safer options of Debt Mutual funds.

Planning for short term goals is a bit different from long term goals. While investing for longer term you are looking for capital appreciation and ready to take risk with your capital, the short term objective is more for safety over growth. Ensuring liquidity of your investment at the right time also matters when it comes to investing for short term goal. 

While considering investment avenues for short term goals lot many traditional instruments pop up. Bank fixed deposit or recurring deposit have been the first choice primarily because it does not fluctuate your capital and you know on paper what you are going to achieve at the end. However taxation gives a bigger blow when short term investments are considered. Short term gains in most of the avenues get taxed at your personal income tax rate and if you are in the higher tax slab then the impact is substantial.

Mutual funds have various categories of schemes. Some of these categories cater to short term investments which can help you in meeting your short term goals. Debt mutual funds have an edge over traditional deposits with the probability of higher returns they are able to generate.

Debt funds are mutual funds that invest in money market instruments like bonds, treasury bills, etc. Unlike equity mutual funds, they are associated with a lot less risk. Their returns are also much more stable when compared to equity funds.

A major benefit of debt mutual funds over traditional products is the variety, Liquidity and convenience. One can invest in debt funds for even one working day to a few weeks or a few months or even a few years by choosing the relevant type of fund. Using SIP, STP and SWP investment options provide added convenience. Debt funds are also useful for investing both in rising and falling interest rate scenarios. Indexation benefits are available for debt funds whose tenure is above 36 months.

Transition from FD to Debt Fund

There was a time when extra cash – bonus, increment – went on to become FDs. Our grandparents, parents have all ended up in investing in FDs. It was the best option to earn interest while ensuring capital protection. What changed? Over the past few years, mutual funds have come to the core. As a result, FD is no longer considered as the most popular long-term investment goal.

 Let’s have a look at the differences between fixed deposits and debt funds. The table below helps you decide which investment is suitable for you.

Funds Masters Recommendations for Short Term Financial Planning

• Safety of invested capital is more important than appreciation.

• Do not invest in Equity Mutual funds for your short term goals.

• Do not invest in long to medium term debt Mutual Funds for short term Goals as these funds are sensitive to interest rates and not suitable for short term goals.

• For money requirement up to 6 months, Liquid Funds or Ultra Short term debt funds are best.

• For money requirement from 6 months to 18 months, low duration funds and money market funds are best suited.