Mutual funds offer active risk management by investing in a diversified portfolio of securities. Fund managers are responsible for actively trading with the underlying securities of the mutual fund to ensure that the scheme is able to achieve its investment objective. Mutual funds hold the potential to offer capital appreciation over the long term. SEBI, the regulator of commodities and securities in India has further categorized mutual funds to allow retail investors to take an informed investment decision. Depending on their risk appetite, investment horizon and investment objective retail investors can decide which mutual fund scheme to invest in.
If you have an investment horizon of 6 to 12 months, you can consider investing in a short term fund or a liquid fund.
What is a short term fund?
A short term fund is an open ended debt scheme whose average portfolio maturity is anywhere between 1 to 3 years. This means that the underlying securities of a short term fund may mature any where between 1 to 3 years making it an ideal investment option for those with a short term investment horizon. Short term funds only invest in debt instruments of those companies who have a proven track record of repaying their loans. A short term fund manager invests in debt instruments of those companies that have a regular cash flow which justifies the companies’ ability to repay the borrowed sum.
What is a liquid fund?
If you wish to park your surplus money for a very short term and earn some interest rather than letting it sit ideal you can consider investing in a liquid fund. A liquid fund is an open ended debt which invests in debt instruments that have an average maturity period of 3 months. Liquid funds may be considered for building an emergency fund or a medical fund as one can instantly redeem their liquid fund units.
Benefits of short term funds
Short term funds may not offer returns as high as equity funds, but their main aim to provide stable returns with minimum investment risk. These funds try to offer capital protection to their investors are ideal for someone who wants to park their money for 12 to 18 months. Short term funds have delivered better returns than bank fixed deposits while ensuring that the investment risk is kept to minimum.
Benefits of liquid funds
Liquid funds can be used to park your surplus cash that is sitting ideal in the savings account. Why let your money sit idle when you can earn some interest on it by parking it in a liquid fund? As mentioned earlier, a liquid fund can also be utilized to build a medical fund. Thanks to its instant redemption facility, an investor can almost immediately receive money in their savings account after selling their liquid fund units. Liquid funds do not come with a lock-in period which make them ideal for those wanting to add liquidity to their investment portfolio.
If you have decided which mutual fund scheme to invest in to address your investment goals, you can consider starting a SIP in that fund. Systematic Investment Plan (SIP) is an investment process that allows retail investors to save and invest a fixed sum at regular intervals in a mutual fund scheme of their choice. Although most investors use SIP to automate their equity fund transactions, anyone can start a SIP to inculcate the discipline of regular investing. Investors can also refer to SIP calculator, a free online tool accessible to all investors.