How To Pick Mutual Funds To Achieve Short Term Goals

Every individual has certain financial goals, but these can be fulfilled only with careful planning and the right investment options. One cannot depend simply on one’s income to pay for every dream one has. It is important to allocate resources to options like mutual funds to fulfil your goals.

What are mutual funds?

Mutual funds are investment options that are professionally managed by investment managers attached to fund houses or private investment companies. The schemes are funded by shareholders trading in diversified holdings. They are broadly of two types: equity and debt. Based on the nature of the online mutual fund you invest in, the investment is made in bonds, stocks and short term debt options.

You can purchase mutual funds online from the best fund houses in India. The best mutual funds in India are those that offer high returns with lower propensity for risk. You can stay invested in them for a long term, or a short term, depending on your investment horizon and risk appetite.

For the purposes of this article, we shall focus on short term goals and how to achieve them using the right kind of mutual funds.

How to use mutual funds to achieve short term goals

Now that you are certain that you wish to invest in mutual funds for your short term goals, we draw up a step-wise guide for you to do so:

  • Start by drawing a financial roadmap

The first step is the easiest – list down the short-term goals you wish to fulfil. These can include closing a home mortgage, buying a two-wheeler, starting a home-based business, doing a home remodel, etc. If it is a significant goal requiring a large amount of money, you should list it down.

  • Define each goal with a timeframe and amount of money

Now that you have listed your goals, put a timeframe for fruition. Suppose you wish to buy a two-wheeler in a year – put that down in your list as ‘Buy a bike – 1 year’. Next to this, add another column to list the amount of money required to make that goal come true. Similarly, list down timeframes and the money required for each goal so that you have an idea of what exactly you are dealing with, and how to cross each goal off the list.

  • Identify the shorter-term goals first – this helps you decide which ultra short term mutual funds you need to invest in

Every goal in your roadmap will have different time frames. Some will require a large infusion of funds, such as a home remodel or closing a home purchase loan. But others can be fulfilled in a year, or in just a few months. Study the timeframes of each goal and identify the ones which have the shortest ones. After this, you can start looking at suitable options such as ultra short term mutual funds in India that are designed for investors looking for gains in a few months to a year. Please note that this class of mutual fund carries higher risk owing to high volatility, and the gains are completely subject to market performance in the vesting period. Meanwhile, the gains attract a flat 20% Long Term Capital Gains tax. If the mutual fund scheme has a holding period less than three years, it can attract Short Term Capital Gains tax. Also ask the fund house for a detailed holding analysis: the scheme might offer lower risk and moderate returns, or it might invest in securities with a low credit rating but which guarantee higher returns. 

On the upside, ultra short term mutual funds offer high liquidity, no TDS cuts, insulation from interest rate volatility, significant returns and short term goal fulfilment (up to 1 year).

  • Consider an STP or two to meet short term goals

Another way to meet short term goals while cutting risk, is to invest in suitable STPs (Systematic Transfer Plan). This is an investment option that allocates resources from one fund to another periodically, so as to allow the investor to switch to higher performing securities and gain a market advantage. With market fluctuations adjusted, the risk is significantly lowered. Meanwhile, the fund allocation happens seamlessly between schemes, with structured fund transfer and allocation. There are three STPs to choose from, based on your goals and risk appetite: 

* Flexible: In this scheme, funds are transferred as and when the need to do so arises, based on the investor’s decision and goals.

* Fixed: In this scheme, the investor decides the fund allocation between schemes and keeps it a fixed amount.

* Capital STP: This scheme transfers the gains from one appreciated scheme to another one with a higher growth potential.

However, you can have STP fund allocation only between schemes from one fund house and not with multiple fund houses.