Often investors have the misconception that mutual fund investments are only helpful in meeting one’s long-term financial goals. This is not true. Though investments tend to function at their full potential when invested for a long duration, there are several types of mutual funds that are suitable for meeting one’s short term needs as well. An investor might opt to invest for a short duration for their goals that are quite near in the future, say one to three years. However, have you wondered what investment options are ideal to park a lumpsum investment for short-term duration? We will provide you with five such investment options.
- Bank fixed deposits (FDs)
FDs are one of the most popular and safest investment options available to investor. Baked by the government of India, these traditional investment options are ideal to park your lumpsum investment for a short-term duration. Offered by several banks and other NBFCs (non-banking finance companies), these investment options allow investors to park their idle money and earn pre-determined and fixed returns. A bank FD can have different investment horizons ranging from a weekto a fortnight to a month, or even up to a decade. Usually, an FD provides fixed returns around 6.5 to 7% p.a.
- Liquid funds
Liquid funds are a type of mutual funds that invest their assets in money market securities such as treasury bills (T-bills), certificate of deposit (CD), cash and cash equivalents, term deposits, commercial papers (CP), etc. that have an investment horizon of up to three months. These mutual funds do not levy any entry or exit charges to investors. As the name suggests, these funds are very liquid in nature, which means that an investor can invest or exit from this fund any time they want.
- Arbitrage funds
These type of mutual funds are ideal for those investors who wish to profit from the volatile markets without exposing their portfolio to too much risk. These equity-oriented hybrid funds leverage the price differential between derivative and cash markets. The profits (or losses) are produced by immediateobtaining and retailing of commodities, securities, or currency in diverse markets at the same time.
- Short-term debt funds
These mutual funds are ideal for conservative investors who do not wish to expose their portfolio to too much risk. Debt funds have time and again proved their worth by offering higher returns than traditional bank deposits. They also happen to be more tax efficient than a bank fixed deposit. However, unlike bank FDs they are exposed to interest rate risks.
- Money market funds
These are type of mutual funds that invest their securities in highly liquid, near-term investment options such as repurchase agreements, T-bills (treasury bills), CP (commercial papers), CD (certificate of deposit), cash and cash equivalents, etc. These mutual funds are devoid of default.
As you wish to invest your money for a shortduration, it is advised to stick to investment options that have a low risk profile. Just like a mutual fund return calculator, a lumpsum calculator can be used to understand the future value of lumpsum investments. Happy investing!