Investors' Hangout: Where to invest for short-term goals?

How to gain maximum return in the shortest possible time?
Highest possible return in the shortest possible time - this is a fancy expectation, and likely to be a very popular expectation. And this is something which will make you extremely vulnerable. Because the moment you want this highest return in the shortest possible time period, you will be attracted to a set of investments where you are more likely to be losing money than making money. And once in a while you will get the illusion that you are making money. Anything which is too good to be true, is unlikely to be true. And that actually gets proven time and again. You should maximise your return over the long run. And you should ensure that you don't lose capital in the short run. And you should be completely risk averse, because for short term goals, you don't want to take chances with the money that you need in three months, three days or five days' time or three months from now. Money that you can actually take chances with is which you need after 10 years. And you can well withstand the ups and downs during this period.

For the short term, where should you invest?
For the short term, don't get attracted to the great returns, rather ask this very basic question - if you are investing for a goal, is it for a negotiable goal or it is a non negotiable goal? Your child is getting into school on a specific day and you have kept some money on the side for that, that is something which you can't negotiate. It must be lying there and it must be there when you need it. So, that money should be in a debt fund or a bank account or that money should be in a bank deposit, you make your choice. The difference is not going to be meaningful. Choose the one which you are most comfortable with. And the difference in return of any vehicle is not going to make a meaningful difference unless that amount for the short term is very sizable.

If you are investing for a negotiable goal, assuming that you plan to go to an overseas holiday and you are targeting a sum of like Rs 10 lakh and if it is delayed in next two years, and if it becomes two and a half years, it doesn't matter. If it happens a little early, you will feel happy, then maybe take a very limited chance with that money, maybe invest in a conservative hybrid fund or some such thing because there is a likelihood that you will get lucky over the next two to three years. In the debt mutual fund, you have a wide variety - you have 16 kinds of debt funds officially to choose from. But your needs are pretty limited, your needs are that either that money will be for a few days to few weeks, or a few months or maybe a few years, but you don't want to take chances with that money. And with this in mind, if broadly there are three kinds of goals for three different timeframes, your needs will be fulfilled very well by a liquid fund or ultra short term bond fund or a short duration fund.

What difference do debt funds make over a bank deposit?
The big difference in mutual fund and bank deposit is over ever since the taxation arbitrage or the way they were treated is gone. I'm hopeful that for a comparable period, the mutual fund will earn you anywhere between 0.5 per cent to 1.5 per cent more than a bank deposit of a comparable period.

But most importantly, there is still one advantage. The advantage is liquidity. In your deposit, you lock your money for a defined timeframe. Of course, you can take it out prematurely. But in the case of a mutual fund, you can take your money back anytime.

And one significant advantage with mutual funds is that if you invest in a fund and you don't redeem it, then you are not liable to pay any tax. You are liable for taxes only when you redeem it and only on the gains. So if you're a long term depositor as compared to a long term debt fund investor, your annual return from the bank deposit will be taxed every year. And here in case of debt funds, it will be deferred till you realise it. So if you don't take your money out for the next 10 years, you're not likely to pay any taxes.

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This article was originally published on August 04, 2023.