Short term goals are those goals for which you require money in the near future. For instance, going on a vacation within the next three months, purchasing a car one year down the line, etc. all come under short term goals. If we think about this in the context of investment, then according to me, short term goals mean anything where you need money within the next four or five years.
The strategy of investment, in this case, would depend on the negotiability of your goal. Goals can be both negotiable as well as non-negotiable. For instance, going on a holiday in the next few months is a negotiable goal, while the need for money for a child’s school admission is non-negotiable.
Hence, the negotiability of your goal within the next five years is the most significant input which will decide the action plan for any kind of investment during this time frame.
You need to split these five years into a comparatively smaller time frame. This will lower the chances of you getting any kind of nasty surprise. If you think that you may need the money within one year or even earlier, then you should invest in a liquid fund. Investing in mutual funds will lower down the risk of surprise. However, if you need a large amount of money, that too within a few days, then you must opt for an overnight fund.
Liquid funds will be quite helpful for you. It gives the advantage of taking money back anytime. You will also get a return for the number of days for which you had invested your money.
If you need money from one to three years, then you can go for an ultra-short-term bond fund. This will give you a little better return as compared to liquid or overnight funds. And if you can wait for more than three years, then you can go for short duration funds. These choices suit your non-negotiable goals. In the case of non-negotiable goals, you do not want any kind of surprise. Also, you need a sure supply of money.
Non-negotiable goals do not have a fixed time period. So, you can stick to either ultra-short duration or short-duration funds. Also, if you have a time period of 3 to 5 years, then you can try and optimize your returns. Equity savings fund will provide you two to three percent more returns. Negotiability of your goals provides you the opportunity to plan your exit in a better way.
It is well known that taxes are non-negotiable. But it is necessary to understand that fixed-income funds are more tax-efficient as compared to other fixed-income alternatives.
If you are investing in a mutual fund, then you need not pay any tax till you realize the gains. Holding the fund for more than three years is indeed a very good option. The tax on it will be then according to the long term capital asset. You will be able to adjust inflation through indexation. The post-inflation-adjusted returns are meant to be taxed. Hence, the tax rate gets quite lower. So, if you can hold funds for three to five years or even more, then it becomes extremely tax efficient.
The first thing that you need to understand is that you need not chase the best performing fixed-income fund. Doing this can bear a dangerous outcome. People generally tend to choose the best-performing equity fund. But this strategy is not right.
It is advisable to go for a fund which will not give you a nasty surprise. Always keep in mind that you are not making an investment in fixed income funds in order to maximize your return. Instead, your purpose is to achieve a little more return and t- ensure the fulfillment of your objective. Be cautious while selecting the fund.
Also, check if the fund has huge positions. Try to avoid a fund that is too much concentrated. Always go for funds that are well diversified.