How to Choose Mutual Funds for a Short Term

Introduction

Mutual Funds were first introduced in India in 1963 by the Indian government, which established the Unit Trust of India (UTI) for mutual funds. Since then, the mutual fund sector has grown considerably, with a number of public and private sector entities opening mutual fund houses. Mutual fund as an investment sector has generally been long term oriented. Due to the systematic investment plan model, mutual funds make it easy and profitable to invest for long duration. This is why mutual funds are considered to be ideal for retirement plans, long term medical expenses, financing of a child’s marriage and other such long term endeavours. However, in recent years, there has been a rise in more flexible models, which focus on short term financial goals.

How to choose short term mutual fund

In order to choose the best short-term mutual fund possible, investors must pay attention to the following factors:

• The financial goal determines the structure of the mutual fund investment. Short term mutual funds are generally suited towards immediate financial needs, such as financing a holiday, moving places, etc.
• Once the financial priorities have been determined, the next step is to determine the duration after which the fund will be required. This can be a very short amount of time. The tenure determines the amount needed for the corpus, with the shorter the term, higher the investment necessary to reach the goal.
• Risk appetite determines the kind of investment and returns one is willing to make. Generally, it is recommended by experts that investors choose low risk ventures for short term investments. This is because, with a short term tenure, investors have very little time to recover if they incur losses. Thus, it is essential to minimize risk as much as possible.
• Investors must carefully consider the reputation of the fund manager and the fund house before making any investments. An established fund with long experience and a fund manager with good track record is essential towards a successful investment.
• Not all types of mutual funds are suited for short term investments. Generally, short term mutual funds are of three categories, these are Liquid Funds, Ultra Short Duration Funds and Money Market Funds.
• Liquid Funds invest in debt instruments with a tenure duration of up to 91 days. These funds have an exit penalty for up to seven days from the start of the investment, after which they can be redeemed any time without penalty.
• Ultra Short Duration Funds invest in fixed income securities such as certificates of deposit, with a tenure duration between 3 to 6 months. These funds have a higher risk than Liquid Funds but also have higher returns potential.
• Money Market Funds invest in market securities such as commercial papers, with a tenure duration of 1 year generally. These funds are more sensitive to market conditions but have the potential to give higher returns than Liquid Funds or Ultra Short Duration Funds.
• Accessibility of funds is important in a short-term mutual fund investment. Generally, funds which have little to no penalties for early termination of mutual fund investment is the ideal option when investing in short term mutual funds.

Additional Read: 5 mistakes to avoid while investing in Mutual Funds

Conclusion

Short term mutual funds are an excellent option for saving money for short term or unforeseen expenses, provided an investor takes into account all the requisite factors and invests intelligently to maximize the chance of higher returns.