Why You Should Invest in Short Term Funds?

Mutual funds have been categorized by market regulator SEBI (Securities and Exchange Board of India). SEBI defines mutual fund schemes as –

“Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.”

Several investors prefer mutual funds over conservative schemes because they are known to offer much better capital appreciation. Mutual funds offer active risk management and thanks to SEBI categorization, investors can distinguish between different schemes based on their investment objective, risk profile, asset allocation strategy, etc. Debt mutual funds are those funds that invest in fixed income securities like commercial papers, bank fixed deposits, company fixed deposits, debentures, etc. They invest in securities that mature over a stipulated period of time. This is why debt funds are preferred by investors as they invest in money market instruments that offer regular income.

What are short term funds?

Adding a short term fund to one’s investment portfolio is ideal for diversification of assets. The reason short term funds are a better option is because they invest in securities that mature in a short span of time. This is the main reason why short term funds do not seem to get affected by volatile markets. They are designed to offer capital appreciation over the short term. Also, short term funds offer a decent amount of liquidity. You can withdraw your short term fund units at any given time without having to pay any exit load.

Why invest in short term funds?

Short term funds give your mutual fund portfolio the liquidity it deserves. This way, you do not have to prematurely withdraw your equity fund units. It is better to let your money do the hard work and help you achieve your life’s long term financial goals through equity funds. In volatile times like the ongoing coronavirus pandemic, one might have to face an emergency. To tackle life’s unforeseen financial emergencies a short term fund can always come in handy

Short term funds offer the option of systematic investment through SIP. Systematic investment plan abbreviated as SIP is an easy and hassle-free way to invest in mutual funds. One can invest small amounts at regular intervals in short term funds. However, the investment amount should not be lesser than the minimum investment amount mentioned in the offer document. SIP investors tend to benefit from rupee cost averaging. When the NAV of the fund is low, more units are allotted. Similarly, when the NAV of the fund is high units are adjusted depending on the investment amount. Systematic investing can also pave the way for power of compounding. The interest earned by the short term scheme is invested back in the fund. In the long run this can lead to the rise in NAV of the fund.

Short term funds do not guarantee returns; hence it is better to consult a financial advisor before investing.