Demystifying Mutual Fund Options – Short-Term, Mid-Term and Long-Term Investment Goals (2024)

Choosing investments can be overwhelming after the initial excitement of planning. It’s like building a house – planning is one thing, but you need to choose the actual materials and then build a house. Similarly, in investing, it is easy to draw everything on paper, but the real deal is practically making it happen.

In this article, we will talk about reducing the overall investment choices to simply help you find the best investment goal that will suit your requirements with a simplified investment guide.

Let’s get started!

Table of Contents

1.)How does the abundance of Mutual Fund Options affect an Investor?
2.)Why is it important to be aware of all the Mutual Fund options?
3.)How to eliminate the Mutual Fund Schemes that you don’t require?
4.)Understanding The 3 timelines of your Investment Goals

• Short-term Goals
• Mid-Term Goals
• Long-Term Goals

5.)Conclusion

1.)How does the abundance of Mutual Fund Options affect an Investor?

Let’s say you go shopping for breakfast cereal at a supermarket. You see hundreds of cereal options on the shelves. Isn’t it overwhelming to have so many options when you need one? Similarly, having a plethora of mutual fund investment options can be overwhelming for investors.

You must choose one option and here is what you can do. Just as choosing the right cereal involves considering factors like taste, nutrition, and price, selecting the right mutual fund investment requires evaluating factors like risk tolerance, investment goals, fees, and historical performance.

With so many mutual fund investment options available, investors may find it challenging to navigate and select the most suitable funds, leading to decision paralysis and confusion.

Managing your money involves choosing between different types of investments like stocks, bonds, real estate, and gold. Within each type, there are subgroups, such as fixed deposits (FD), Public Provident Fund (PPF), and bond funds. Even after picking mutual funds, there are many options, with 37 categories for open-ended funds alone.

To just put this into perspective, there are over 1200 schemes in the market, each offering various options like growth or income distribution making investing overwhelming.

So, how do we tackle this financial maze? For effective investment decision-making, the key is to establish filters that simplify choices and make essential decisions early on. Before diving into the specifics, let’s understand why financial education is crucial in this process.

2.)Why is it important to be aware of all the Mutual Fund options?

So, why do you need to know about all these Mutual Fund schemes? You might think we will tell you one mutual fund investment scheme, and you can simply invest in it to gain a huge financial advantage. But is it reliable? Well, unfortunately, no, things don’t work like that.

One of the reasons why you should educate yourself about all these options is to know where not to invest your money. Understand that there is no “one fit for all” scheme that is perfect and doesn’t bear any risks. If it were that easy, then investing would have been a very easy journey (it is still easy, hire the right financial advisor and follow him holistically!!).

3.)How to eliminate the Mutual Fund Schemes that you don’t require?

So, how do we cut these extra options out of your investment plan? The most fundamental way to do this is to use it to find schemes that suit your requirements. For example, if you think investment A will help you achieve more than investment B, C, and D, then you can simply eliminate them. But the real deal is knowing what exactly fits your requirements.

To understand this, let’s take an example– suppose you want to declutter your wardrobe. You have to get rid of those clothes that you don’t need any longer. Similarly, to eliminate unnecessary mutual fund options, you can start by assessing your investment goals, risk tolerance, and time horizon. This will help you with the initial step of decluttering.

After that, you have to narrow down your choices by filtering out funds that don’t align with these criteria. Just as you might remove clothes from your closet that no longer fit or suit your style, eliminate mutual fund investments that have high fees, poor historical performance, high tax charges, or strategies that don’t match your investment objectives.

By streamlining your options, you can focus on a more manageable selection of funds that better meet your needs.

Here, we will use the timeline of the goals to help you eliminate all the options that don’t fit your requirements. Keep reading to see how we categorize each scheme according to these timelines to help you reach a better goal.

4.)Understanding The 3 timelines of your Investment Goals

So, we decide based on our target goal, where to invest. These targets are categorized based on the timeframe for needing the money:

1. Short-Term Goals: This contains financial products needed for very short-term use, from tomorrow to three years.
2. Mid-Term Goals: This includes financial products for needs between three to seven years away.
3. Long-Term Goals: This consists of products that will provide the needed money after at least seven years and are a very reliable long-term investment option.

But you also need to be very careful about this. When choosing products, focus on the time distance from today rather than the return they offer. The closer the need to today, the lower the return might be, and that’s okay as long as it meets all the timeframe requirements.

Let’s know about these timelines linked targets in detail to make your investment journey easy and effective.

1. Short-Term Goals

So, what exactly is a Short-Term Goal? This target aims to provide you with the desired returns within three years of investment.

The Short-Term Goals contain financial products needed for short-term use (for tomorrow to next month, in six months, to a year, or up to three years).

Here are the major elements that we need to take care of while investing for Short-TermGoals

Accessibility: The money should be available when needed without the risk of losing its value. It should be readily accessible in a bank account or a liquid fund, especially for immediate needs.

Liquidity: The money should be easily accessible without any delay or penalty. However illiquid assets like real estate or long-term investment products aren’t suitable for short-term needs.

Safety: Short-term investments should carry lower risk compared to long-term investments. The funds must remain free from the risk of the principal losing value, a risk that exists in assets like real estate, gold, traded bonds, and stocks. The funds required for tomorrow should be securely held in the individual’s bank account, poised for a swift transfer when needed

Now that you understand what the Short-TermGoals signify, let’s see some of the best short-term financial investment options.

• Savings deposits or current accounts for immediate needs.
• Fixed deposits with commercial banks for slightly longer need (up to three years).
• Mutual funds, particularly liquid funds, for increased liquidity and potential returns, especially for needs beyond six months.

If you are looking for something within debt mutual funds, focus on categories like liquid, money market, and banking and PSU funds, which match short-term needs. But remember, do not run for high returns as the focus should be more on simplicity and efficiency in managing your money and putting it to use as and when required.

Utilize liquid funds for very short-term needs and gradually transition to money market funds for needs within the next two years. For needs beyond two years, consider banking and PSU bond funds, ensuring the average maturity of the scheme matches your holding period requirement.

If you are tired of all these popular options, you can go for a new category– Target maturity funds (TMF). TMS can also be useful for specific future goals, as they consist of bonds maturing on a particular date. But, at the same time, it is necessary to be aware of the lack of indicative returns provided for TMFs and stay updated on any innovations or changes in this category of funds.

1. Mid–Term Goals

Simply put, the Mid–Term Goals aim to provide you with the returns you need in between three to seven years. If you’re aiming for a slightly big corpus, you’ll need between three and seven years from now— it’s hard to know exactly when or how much you’ll need. So, it’s smart to use rough estimates, guessing you’ll need more money and less time than you actually will.

Some of the notable nuances of the Mid – Term Goals include

Potential for higher returns: Compared to keeping your money in a traditional savings account, mid-term investments typically offer the potential for higher returns over time. This can help your fund grow more quickly and may even help you achieve a higher corpus than planned.

Diversification: By having a diversified investment portfolio, you spread out your risk and reduce the impact of market fluctuations on your investment.

Flexibility: While mid-term investments are designed to be held for several years, they still offer a degree of flexibility compared to long-term investments. If you need to access some of your funds before your actual goal, you may be able to sell a portion of your investment without incurring significant penalties.

Here are two best mid-term investment options that will help you reach your financial goal

Banking and PSU funds: These are safer than fixed deposits and could give you better returns, especially if you need the money within five years.

Conservative hybrid funds: These balance risk by mixing stocks and bonds, which is good for goals that are more than five years away.

Other options like duration-based funds and corporate bonds are available, but they may lack the liquidity of more mainstream investments like government bonds. Changes in interest rates can impact the value of existing corporate bonds adversely. If interest rates rise, the market value of existing bonds may decline. The corporate bonds also come with risks of credit downgrades, so they’re not as appealing right now. Target maturity funds (TMF) are new and might work for specific future goals.

There are other ways to keep your money for short- and medium-term needs in debt funds, but it’s better to keep it simple than try to perfectly match your needs with specific categories.

But remember, having a professional opinion on this is very important. If it’s getting difficult, you can simply ask for advice from a financial advisor. This will help you navigate options like floating rate funds or credit risk funds, especially since debt investments come with more risk when your goal is getting closer.

1. Long–Term Goals

Mutual fund Investments are more suited for Long-Term goals when compared with Mid-Term Goals.

To understand the long–term investment, here is a simple example you can consider. Imagine you’re planning for your retirement, which is still decades away. You can go for a long-term investment goal to have a bigger corpus in the future. And it’s great, to be honest. Why? Instead of simply saving money in a piggy bank, you decide to invest in long-term assets such as stocks, bonds, or real estate.

So, what are the benefits of a long-term investment for your retirement savings here?

Compounding returns: By investing in assets that generate returns over time, you can take advantage of the power of compounding. This means that not only do you earn returns on your initial investment, but you also earn returns on the returns, leading to exponential growth over the long term.

Higher potential for growth: Historically, long-term investments like stocks have provided higher average returns compared to short-term or mid-term investments. While they may be more volatile in the short term, over the long term, they have the potential to outperform other types of investments and help your retirement savings grow significantly.

Inflation protection:

Long-term investments have the potential to outpace inflation, helping to preserve the purchasing power of your savings over time. This is crucial for retirement planning, as it ensures that your savings will be able to maintain your standard of living even as prices rise in the future.

By adopting a long-term investment strategy for your retirement savings, you can harness the power of compounding returns, benefit from the potential for higher growth, and protect your savings against the erosive effects of inflation, ultimately helping you achieve a more financially secure retirement.

But where should you invest? For long-term goals that are more than seven years away, equity mutual funds are a better option than debt funds.

Among equity and hybrid categories, certain ones are most relevant for the average investor. We are not talking about large-cap funds because they often struggle to outperform benchmarks. And that’s the reason they are also not considered a genuine option when it comes to planning financial goals with Future Aspirations. Rather, investing in low-cost index funds can be a smarter choice as it removes the risk of relying on a fund manager and the need for constant monitoring.

On the contrary, popular categories like dividend yield, value/contra, and focused funds don’t offer any significant advantage. Even flexi-cap funds lean towards large-cap stocks. This is a major disadvantage if you are aiming for a bigger corpus in the future. But, if you invest in multi-cap funds that spread investments across different market cap sizes, then you will have the advantage of portfolio diversification.

Sectoral/thematic funds are high-risk and not recommended for general use unless you have a deep knowledge of a specific sector and risk tolerance. ELSS funds, on the other hand, are good for tax deductions under Section 80C, especially for those who haven’t used up their limits with PF and PPF.

If you don’t want to get exposed to a high-risk environment, then foreign funds might not be an ideal option here. They carry higher risk and are suitable only for experienced investors with large portfolios looking for more diversification. They’re typically not part of a beginner’s mutual fund portfolio and so may be avoided.

5.)CONCLUSION:

Investment is a long-term game– you have to keep educating yourself about the trends and different schemes and updates regularly. While having some good choices is helpful, a lot of investment options might be overwhelming. That’s why we have three simple money categories tailored according to your investment requirements.

The three simple categories are short-term, mid-term, and long-term.

• Short-term Needs (Within 3 Years) prioritize accessibility and liquidity the most, where options like savings accounts, fixed deposits, or liquid mutual fund investments sit well.
• Medium-term Goals (3 to 7 Years) mainly focus on approximations and diversification. Conservative hybrid funds and banking and PSU funds can offer a balanced approach with moderate risk, hence the perfect mid-term invested options.
• Long-term Goals (7+ Years) usually opt for a mix of equity and debt instruments. If you are looking for a bigger corpus in the future, then consider options like Equity Mutual Funds and PPF and PF for the debt component.

In case you remain confused about your investment, instead of following amateur information on social media sites such as Quora, Facebook, Twitter, etc, consider professional advice for complex or high-risk investments or seek guidance from financial advisors or distributors to make sure that the choices align with your goals and risk tolerance. Always remember simplicity and diversification are key to building a balanced and rewarding investment portfolio.

Happy Investing!!!