Often investors have a misconception that mutual funds are ideal solely to achieve their long-term goals. However, that’s not true. Depending on the type of mutual fund you invest in, you can invest in mutual funds to achieve your both short-term and long-term investment goals. You can invest in mutual funds for a short duration to cater to your investment goals in the near future, say one to three years. Examples of short-term investment goals include buying a new car, paying for home loan, saving for a family vacation, etc. There are two ways you can invest in mutual funds – SIP and lumpsum. In this article we will understand the various investment options to be considered to park a lumpsum investment for a short duration.
Investment options to park a lumpsum for short-term
Following are five different types of investment where you can park a lumpsum to cater to your short-term investment goals:
- Liquid mutual funds
Liquid funds are a type of mutual funds that invest their assets in money market havens that have a maturity period of up to 91 days. Liquid funds invest their securities in several fixed-income securities such as term deposits, certificate of deposit (CD), cash and cash equivalents, call money, treasury bills (T-bills), commercial papers (CP), etc. Several investors prefer these mutual funds as they do not impose any entry or exit load charges as they are highly liquid in nature.
- Bank fixed deposits (FDs)
These investment options are widely popular among investors for the safety it offers to investors. Backed by the Indian government, bank fixed deposits are one of the ideal investment options to park a lumpsum amount for a short tenure. Offered by most banks and NBFCs, these investment options permit individuals to deposit their idle cash to earn a fixed and pre-determined rate of interest on their investments.
- Arbitrage funds
These mutual funds are an ideal investment option for individuals who wish to benefit from the volatile markets without exposing their portfolio to high risk. These equity-oriented mutual funds enjoy the price differential that arise between the cash and the derivative markets.
- Short-term debt funds
Debt funds are ideal for conventional investors that have a low risk appetite. These mutual funds have constantly proved their worth to investors by providing a higher degree of returns than traditional investment options. Debt funds are relatively safer than other investment options such as equity-oriented funds. However, one must note that these investment options are not immune to interest rate risks.
- Money market funds
These mutual funds invest their assets in highly liquid investment options that have a short-term maturity such as T-bills (treasury bills), repurchase agreements, CP (commercial papers), cash and cash equivalents, CD (certificate of deposit), etc.
For investors who wish to park their money for a short term, it is recommended to invest in securities that have a low risk profile. Always make sure that the type of investment you decide to choose aligns with your risk appetite, investment tenure, and financial goals. You can also use a lumpsum calculator to evaluate the future value of your investments at the end of the tenure. Happy investing!