When it comes to short-term cash management, the investors look for the safest and the easiest way of growing the money but at the same time the money should be easily accessible. Thus, mutual funds have become an increasingly attractive option for short-term investments because of their potential for higher returns and various investment strategies tailored to different risk appetites. In this blog, we’ll explore some smart ways to invest short-term cash in mutual funds.
Benefits of Investing Short-Term Cash in Mutual Funds
Some benefits of investing short-term cash in mutual funds are discussed below :
Higher Returns
Mutual funds offer relatively higher returns as compared to Savings accounts and FDs. Mutual funds, especially debt, and liquid mutual funds, tend to offer more attractive returns with the potential for much higher capital appreciation.
Liquidity and Flexibility
Mutual fund investments provide many benefits to their investors, but one of the key advantages of investing in MF is their liquidity. It allows investors early encashment of their investments which makes it more flexible than other short-term investment options like fixed deposits which often attract penalties for early redemption.
Diversification
Mutual funds pool investors’ money and diversify it across a range of assets like stocks, bonds, etc. to spread the investor’s investment risk. Even in short-term funds, this diversification helps to spread the risk and minimizes exposure to any one asset class or sector.
Types of Mutual Funds for Short-Term Investments
Here are some of the smart ways to invest short-term cash in money market funds.
Short-Term Debt Funds
Investments in debt securities with shorter durations or maturities are the main focus of short-term debt funds. These mostly include government securities, debt, and money market instruments. Their maturity is often between one and three years. These funds are more vulnerable to changes in interest rates than liquid funds; however, short-term debt funds tend to offer better returns, especially when market conditions are favorable.
Fixed Maturity Plans (FMPs)
Fixed-maturity plans invest in fixed maturity period securities. The goal of FMPs is to match the maturity of the securities in the fund with the investor’s investment horizon. While they provide predictable returns, the funds are locked in until maturity, making them suitable only if an investor won’t need access to the funds before the stated maturity date.
Ultra-Short Duration Funds
Ultra-Short Duration funds invest in debt instruments with longer maturity. They generally have a maturity period ranging from 3 to 6 months. They can be an ideal choice for investors who are willing to take on a slightly higher risk in exchange for potentially better returns.
Liquid Funds
Liquid funds are a type of debt mutual fund that invests in short-term money market instruments such as commercial paper, government securities, treasury bills, etc., with a maturity of up to 91 days. These funds provide higher returns than savings accounts or short-term fixed deposits and have a very low-risk profile. They are ideal for investors who seek quick access to their money without compromising too much on returns.
Money Market Funds
A money market fund is a type of mutual fund that invests in securities with short durations. Investors can benefit from high liquidity and minimal risk through money market funds. SIPC offers insurance for money market funds.
Conclusion
Investing short-term cash in mutual funds can be a smart way to earn better returns while keeping the investment liquid and accessible. By carefully selecting the right type of fund investors can optimize their investment and achieve their financial objectives. While there’s always some level of risk in any investment, the key is to choose the right funds that align with investors’ risk tolerance and objectives.
