Usually investors invest in mutual funds to meet their long-term objectives. However, that may not always be the case. Mutual fund investments can also help you meet your short-term needs and goals. Investors invest for short duration either because their goals are near or they don’t wish to risk their capital by locking their capital for a long tenure. Although, there is no properly defined tenure for short-term investments, anything invested for a duration of 7 days to 1 year can be considered as short-term investments. But what are the investment options available to investors to park their lumpsum investment for a short duration. Read on to know about the several types of investments where you can park your money:
- Bank fixed deposits (FDs)
Bank deposits are one of the safest and the most popular choice for parking your money for a short-term. These investment options are accompanied by various tenures ranging from 7 days, 14 days, 1 month, or even up to ten years. These deposits can also be renewed and re-invested on maturity.A typical FD offers returns around 6.5 to 7% p.a.
- Liquid mutual funds
These are open-ended mutual funds that invest their capital in money market instruments such as commercial papers, certificate of deposit (CD), term deposits, treasury bills that have a maturity of up to 3 months, etc. These funds do not have any maturity period and extry/exit load. Thus, these mutual funds are highly liquid in nature. Redemptions from these funds can be processed within 1 working day.
- Arbitrage funds
Arbitrage funds use futures and equity to create the equivalent of a debt securities. These funds generate returns by instantaneous buying and selling of securities, commodities, or currency in diverse markets at the same time. These funds also do instantaneous purchasing and sale of securities in both derivatives and cash markets in order to lock-in a particular amount of profit.
- Short-term debt mutual funds
These funds are ideal for risk-averse investors with an investment horizon of 6 months to 12 months. Debt funds have the potential to generate higher returns than fixed bank deposits and is also more tax efficient than a bank FD. However, investors must note that these mutual funds are not immune to interest rate risk. But, they make up for it by offering higher returns than money market funds and FDs.
- Money market funds
These are considered to be one of the lowest risk products among mutual funds. These funds typically invest in ultra-short government securities such as treasury bills, call money market, treasury bills, banks certificate of deposits etc that maturity of up to three months to twelve months. These funds are void of default risk. However, they carry a very insignificant amount of interest rate risk.
You can also use a mutual fund lumpsum calculator to understand the future value of investments. Happy investing!