Link debt mutual funds to your short-term goals

You may wake up one morning and decide to buy a new mixer-grinder or a new vacuum cleaner, and this may not affect your budgets majorly. But can you make an impulsive decision when the stakes are higher? For example, if you want to buy a new car or pay the annual school fee for your child? In all likelihood, you can’t. And therefore, planning for short-term goals is a necessity and for these you may want to consider debt mutual funds

Before YOU go out looking for best performing debt funds for short term goals, let us first understand more about them

Any goal that has an investment horizon of 3 years or lesser, are typically short-term goals. For example-

• 1. Parking excess funds for a short while

• 2. Buying a car

• 3. Down payment of your home loan

• 4. International Vacation

• 5. Child’s school fee

• 6. Buying a big-ticket electronic item like AC/refrigerator

These are just a few mentions out of the many short-term goals that you may have.

What you need to remember is that your aim here is to try & achieve relatively better returns as compared to traditional investments. That too with less volatility compared to equity fund within a short-term period with the ease of liquidity.

When you are investing in a debt mutual fund, you are basically lending to the Government or other corporates through bonds. You can read more about how debt mutual funds work, here. Now, herein lie the issues of whom to lend to, when I can get my money back, what if they default, etc. You can argue that your short-term goals are well accomplished with the traditional investments that give you a fixed return, then why must you invest in debt funds?

Debt funds may provide you with liquidity, transparency, diversification, professional expertise, tax-saving and opportunities to garner returns. Out of all the debt funds types, you will find a type of fund suitable for any goal that you may have. For example, if your goal is to buy a new AC/ refrigerator 6 months- 1 year away, you can invest in ultra short duration debt funds. Debt funds generally come with no lock-in periods; hence your money is accessible at all times. The fund manager uses his/her expertise to either minimize the risks or take on calculated risks such that your investments can strive to achieve better results. . In addition, you have access to the fund portfolio at all times as the fund house ensures such information is made available to you regularly; this is unlike the traditional investments that may lack transparency.

While the short term capital gains on other than equity oriented mutual funds are taxable as per your income tax slab rates, however, if you have invested in it for more than 36 months, your long term capital gains will be taxable @ 20% with the indexation benefit (for resident investors). These tax rates are excluding applicable surcharge

Your choice of a short term debt fund will depend on your goal, investment horizon and risk appetite. The choice can be subjective, but your aim should be to at least match inflation in the short-term if not beat it, which may be possible with debt mutual funds. Here are the types of mutual funds available to you, take a pick today.