Home Finance Why Is It Wiser To Invest In Short Term Schemes?

Why Is It Wiser To Invest In Short Term Schemes?

by Paul Watsdon

Every financial advisor recommends investors to have a defined set of financial goals before they start investment planning. Financial planning is essential for anyone who wishes to achieve financial success. The first step of financial planning is making a list of your short term and long term financial goals. Investors with a defined set of goals are often successful in their investment journey. Goal based investing is known to never fail because you do not want to give up on your goal of buying that dream home you always wanted.

Before investing, one must understand that there is a plethora of schemes to choose from and every investment scheme carries a different risk profile. Which is why, it is necessary for investors to understand their appetite for risk before investing their hard earned money in any type of scheme. If you are someone who is unhappy with their existing investments are looking forward to investing for a sustainable future, then you can consider investing in debt mutual funds.

What is debt mutual funds?

Debt mutual funds are one of the most sought after mutual fund scheme investments are equity funds. While equity funds predominantly invest in equity and equity related instruments, debt mutual funds are open ended scheme which invest in debt and money market instruments. The purpose of every debt fund is to offer stable returns with minimum investment risk.

What are short term schemes?

As per SEBI guidelines, a short term fund must invest in debt and money market instruments such that the Macaulay duration of the portfolio is between 1 year to 3 years. Short term funds are ideal for anyone who wishes to earn decent capital appreciation without exposing their finances to equity market’s volatile nature.

Why is it wiser to invest in short term schemes?

Short term schemes hold the potential to offer decent capital appreciation. These schemes have delivered far better results than conservative schemes such as bank FDs in the past. Also, these schemes do not have any lock in period. Investors can withdraw their investments at any given time and redeem their short term fund units in a jiffy. The amount is transferred to your linked savings account and the remaining amount continues to accrue interest. This is not possible with bank FDs that come with a predetermined lock in period. If you break your FD, not only will you lose on the fixed interest rate, you might even have to pay a penalty for prematurely withdrawing from the investment.

Short term schemes have the option of SIP investment. Systematic Investment Plan is an investment approach where you can invest small fixed amounts at regular intervals. One does not need to have a large investment amount for investing in short term schemes. They can now invest a small fixed amount at regular intervals via SIP and continue investing till their investment objective is achieved. A Systematic Investment Plan is an easy a hassle free way to invest in mutual funds. All an investor has to do is complete all the formalities and KYC documentation before starting investment. Investors can also refer to SIP calculator, a free online tool to help you determine how much corpus your SIP investments might accumulate at the end of the investment tenure.

Short term funds are a better investment option than equity funds as well as conservative schemes like bank fixed deposits. However, investors should understand that short term schemes are prone to credit risk as well as interest rate risk. Investors should discuss their goals with their financial advisor before investing.