How to Choose Mutual Funds for the Short-Term?

Short-term mutual funds are one of the most popular ways to invest. They can be used by new and experienced investors. All you need to know is the basics, and you should be willing to learn more to make well-informed decisions.

A mutual fund is a way to invest that combines the money of many investors into a single pool to make an investment product. The fund manager can then use this money to buy stocks, gold, bonds, and other securities. The fund manager maintains a ratio among these investments, which gives the mutual fund a specific interest rate. As a result, different mutual funds are used for different goals.

How to choose the best short-term mutual funds for your investment? This article will help you through the selection process.

Step-by-step process of selecting a short-term mutual fund

1. Know your goal.

The first stage in selecting a short-term mutual fund is determining your investment objectives. They include the amount of time you plan to hold the fund, the rate of return you expect, and so on. But even if you do not have a clear goal, you do not have to cut your journey short.

For example, a higher education, a down payment on a house, or even retirement can be a goal. A mutual fund’s category—debt, equity, or hybrid—can be narrowed down based on your desired outcome.

2. Research the mutual funds before selecting.

When it comes to choosing the right mutual fund, there are many things to think about. You need to consider your return expectations, risk appetite, financial goals, investment knowledge, etc. You can judge the investment by its historical behaviour, operating margin, the fund manager’s experience, and more.

Before you start investing, you should do some research. This will help you make a better decision and give you a better idea of “what’s what” in the mutual fund world.

3. How much risk can you take?

Every investment is subject to some level of risk. One of the primary objectives of any investor should be to reduce that risk while simultaneously increasing the potential for return on investment. It is imperative that when investing in short-term mutual funds, you select investments that expose your capital to the least amount of risk feasible. This is because, with a goal of less than one year, you may not have enough time to recuperate from any losses.

4. Decide how much money you can invest.

When you need to reach your goals in a short period, you need to make swift and surefire investments and get your money back. In mutual funds, the “lock-in period” is the period when you cannot sell any of the units you purchased.

Short-term investment goals do not work well with investments that have a lock-in period or are hard to cash out for any reason. The reason is simple: you will need the invested funds quickly. Your savings should be easily accessible once you have met your investment target. You may find it hard to complete your original mission if you are forced to wait to retrieve your investment.

5. Study the performance of the short-term mutual fund.

The success of a fund is important and should be studied beforehand. You should check the periodical performance of the fund, like one month, three months or six months. It’s safe to assume that a short-term mutual fund is not worthwhile if it has underperformed in previous years.

Checking the manager’s or team’s track record is crucial when assessing the success of a short-term mutual fund. Investors should select a fund based on the amount of risk they are willing to take.

6. You can choose between direct and regular plans.

A mutual fund scheme can either be a direct or regular plan. In a direct mutual fund, investors purchase NAV units directly; investors can do so from a relevant fund house. In a regular mutual fund, an investor needs the assistance of a commissioner or broker (called an AMC) who charges a commission.

Returns are somewhat better with a direct mutual fund since there are no commission charges. Commission fees are typically between 2% and 2.5 %, though they can be higher or lower depending on the asset manager and broker.

For regular plans, the AMC would often compensate the brokerage for bringing in new customers via a commission. Due to this, the total returns on the investment will be lower.

Before the introduction of short-term mutual funds in India, investors had little need to look beyond the tried-and-true method. However, now several portals provide you with the essential resources to make investing selections.

7. You need to create an investment strategy.

Most people who invest do not focus on creating an investment strategy. But, it is a necessary part of how well your investment portfolio does. 

A systematic investment plan (SIP) is one of the most liked investment strategies. Using SIP, a selected amount is deducted from your account and invested in the mutual fund on a pre-decided date. All mutual funds allow SIPS of a set amount.

SIP ensures that you are regular in your investment in mutual fund units. SIPs are an excellent strategy if you do not remember to make purchases. Instead, you do not need to set reminders because the money is transferred directly.

Conclusion

Choosing short-term mutual funds may seem hard, but it is easier if you research and know what you want to achieve. If you follow the steps above for choosing the best short-term mutual funds, your odds of success will increase.

Visit Piramal Finance for more insightful articles on investing and short-term mutual funds.