The best way to go about selecting a mutual fund is to first figure out why your client wants to invest their money. If it is for short term goal like funding a trip or making a down payment for a car, your clients cannot invest their money in volatile asset classes like equity funds.
For short term goals, your clients should invest in short term funds as these funds offer capital protection and aims to deliver returns that are over and above inflation.
What are?
Short term funds invest in securities that have a maturity period of 1-3 years. Since the aim is to preserve capital, these schemes generally do not take risk by investing in low rated papers. These schemes invest in safer debt instruments like commercial papers, certificate of deposits and government bonds.
Advantages of investing in short term funds
The returns generated by these funds are often higher than bank fixed and term deposits. They also offer high liquidity compared to other debt instruments. Your clients can withdraw their money anytime.
Another advantage is lower taxation. If your clients hold short term funds for over 3 years, they can avail indexation benefits which lowers the tax outgo thereby increasing effective returns.
Selecting short term funds for investment
Experts believes that one should not go by past returns and select the fund which has delivered the highest returns.
Since safety is the biggest advantage of short term funds, investors should exercise caution and go for the fund that has the least possibility of giving a bad surprise.
The best way to identify such funds is to look at the credit ratings of securities held by the funds. Make a list of funds with high quality portfolio before shortlisting short term funds for investors.
Disclaimer: An Investor Education Initiative by Mirae Asset Mutual Fund
For information on one-time KYC (Know Your Customer) process, Registered Mutual Funds and procedure to lodge a complaint, refer to the knowledge center section available on the website of Mirae Asset Mutual Fund
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
