Are mutual funds ideal for short-term investing?

We are all privy to the multiple benefits of mutual fund investing over the long term, but did you know that there are superb mutual funds for short term investments too? If you have been saving up for an emergency fund, or just keeping money in your savings account, you are stopping your hard-earned money from working for you!

All you need to know about short-term mutual funds

When your money accumulates in your savings account, it usually earns interest in the range of 3.5% to 4%. With the average long term inflation rate in India close to 5-6%, the returns generated on your savings account will not even beat inflation. At the same time, you might want to keep your money in a place that has minimal risk and is easily accessible. So, what do you do?

You invest in mutual funds. Now you must be wondering how mutual fund investments can help you in the short-term considering that generally mutual fund investments are known to be good vehicles for long-term growth. However, there are several options available in the mutual fund space to meet your short-term investment needs as well. Short term mutual funds could range in tenure from a week to a year or even three years, with liquid funds and ultra-short term schemes being your best options for near term financial horizons. Mutual funds for short term investing usually park their corpus in highly rated commercial papers, certificates of deposit, bonds, and other money market securities which are redeemable within the me period of one to three years. This means that these funds can offer you potentially better returns than savings accounts and fixed deposits and can meet your risk parameters.

Short Term vs. Long Term Investment

Statistically speaking, mutual funds are known for strong returns over a longer period of time, given the factor of compounding interest. This means that, the longer you stay invested, the better your interest becomes, since it keeps compounding over the years. Long-term mutual funds also enable you to overcome market cycles and volatility, offering you stronger returns. While you can always exit your mutual fund holding at any point in time, if you really want to benefit from the return potential of equies then it is better to stay invested for at least five years or longer. Further, these investments are usually made for long-term goals like retirement planning. From that perspective, long-term investments in mutual funds can be a great opon as long as you do not need money in the short term.

However, it is also important to hold mutual funds for the short term, as these allow you to enjoy potentially good returns while keeping your funds handy for emergencies. Below are a few things to keep in mind if you are looking to invest in mutual funds for the short term.

Short duration funds usually do not charge exit loads and these can be redeemed in T+1 days, which is one working day are the transaction. This means that you always have your funds at hand, helping you stay ready for difficult scenarios.

Different tax norms are applicable on mutual funds for short term and long term.

Given the benefits of short term investment plans, consider mutual funds for short term when chalking near-term financial plans.