Mutual funds (MFs) are not just about stocks and market risk. There are different categories of funds depending on the investments made in equities, debt and money market instruments. Depending on your needs and risk appetite, you can choose a fund that suits you.
Depending on your needs and financial goals, you can divide your finances into four categories: emergency funds, short-term funds, medium-term funds and long-term funds. If you wish, you can manage all these funds through MF programs.
Money you need immediately in an emergency should be kept in an emergency fund. Although it is impossible to predict the amount of money one might need in the event of an unforeseen event, it is said that a salaried person should keep at least six months’ salary in such a fund.
Besides cash and savings bank accounts, you can use overnight funds and/or liquid funds to park your emergency fund. As these funds invest in debt securities with overnight or very short maturities, the invested capital generally remains stable.
Although the returns are very low, these funds offer excellent liquidity. You can make a redemption request even on Saturdays and Sundays, and the redemption amount will be credited to your bank account the next day, if the request is made before the cut-off time.
Money needed within a short period of six months to two years is kept in a short-term fund. For example, if someone has taken out a loan to build their house and payments are due in phases over the next 24 months based on the progress of the construction, that money can be kept in a fund to short term.
As you cannot expect recovery in the event of a reduction in invested capital due to market volatility, you should avoid equity exposure and invest in funds such as short-term debt funds and dynamic bond funds which offer low but stable returns.
The money needed in the next 3-4 years can be kept in medium-term funds. For example, if you have accumulated the money needed to reach a financial goal in 3-4 years through equity investments and want to reduce market risk, you can transfer the money to a medium-term fund.
In such a case, you need to protect your capital and you will also need to earn a higher return to fight inflation over the next 3-4 years.
Since pure debt funds may not be able to beat inflation, you can reduce market exposure from 60-100% to 20-25% by moving the rest of the money into debt funds. debt. Alternatively, you can transfer money from equity funds to conservative hybrid funds and leave portfolio management to professional fund managers.
Money that is not needed in the short to medium term and that can be saved for a long term or to meet long-term financial goals can be placed in long-term funds. For example, the money needed for the education of a child after 10 years or to accumulate retirement capital to be used after 20 years can be transferred to such a fund.
Since the investment objective of a long-term fund is to beat long-term inflation by obtaining a higher yield – in the absence of short- and medium-term bonds – you can invest in equities. The amount of equity exposure will depend on whether you need to take risk to achieve long-term financial goals and your ability to take risk, ie your risk appetite.
Even within the equity segment, you will have the opportunity to invest in medium-risk aggressive hybrid funds to very high-risk short-term funds. The higher the risks, the greater the prospect of generating superior returns over the long term.
However, before investing in equity-based MF programs, you must write your financial plan well and enter the markets with a vision to achieve your long-term financial goals. Otherwise, if you enter the equity segment just to get higher returns, you risk leaving during a market downturn after seeing negative returns.