How Short Term Funds Can Help Recover From COVID-19’s Impact
Mutual funds are a powerful tool to earn capital appreciation. A lot of people feel that one should only invest in mutual funds if they have a long term investment horizon. However, that may only be applicable to some mutual funds that predominantly invest in equity and equity related instruments. If you don’t know how mutual funds function, what fund houses and Asset Management Companies do is that they collect money from investors sharing a common investment objective and invest this pool of funds across various asset classes. Depending on the nature of the scheme and its investment objective a mutual fund may invest across various securities and money market instruments like equity, debt, gold, corporate bonds, government securities, real-estate, company stocks, debentures, etc. In volatile markets, mutual funds offer active risk management. It is the duty of the fund manager to buy and sell securities so that these mutual fund schemes can perform even in languished market conditions.
Mutual funds have been broadly categorized by SEBI based on their certain unique attributes like fund size, asset allocation strategy, investment objective, risk profile etc. Equity mutual funds are one of the most sought after mutual funds because of several reasons. They are known to carry a high risk rewards ratio, give investors an opportunity to seek capital appreciation from various company stocks, and have given far better returns as compared to traditional investment avenues like bank fixed deposits. However, there are times when markets underperform beyond the expectations of investors. Something like this generally happens when a global pandemic strikes, shaking the economies of countries across the world.
In such turbulent times, the priority of every investor must be to make sure that their portfolio doesn’t get over affected by the ongoing market crisis. In such a scenario what most people do is that they end up withdrawing their mutual fund units. What they do not realize is that their portfolio is already incurring losses. In such a scenario it is better to remain invested. Remember that the markets aren’t going to underperform forever. We need to give our investments a chance to recover.
Therefore, it is better to not totally depend on equity funds. One can even invest in debt funds like short term funds. Adding short term funds to your investment portfolio is always a good option. The reason short term funds are a better option is because they invest in securities that mature in a short span of time. This is the main reason why short term funds do not seem to get affected by volatile markets. They are designed to offer capital appreciation over the short term. Also, short term funds offer a decent amount of liquidity. You can withdraw your short term fund units at any given time without having to pay any exit load. Short term funds give your mutual fund portfolio the liquidity it deserves. This way, you do not have to prematurely withdraw your equity fund units. It is better to let your money do the hard work and help you achieve your life’s long term financial goals through equity funds. In volatile times like the ongoing coronavirus pandemic, one might have to face an exigency. To tackle life’s unforeseen financial emergencies a short term fund can always come in handy. You do not have to withdraw all your short term fund units. You can only withdraw the amount that you need, and the remaining amount continues to accrue interest.
Mutual funds like short term funds can help you recover COVID-19 crisis. But it is better to consult a financial advisor before investing.
