Generally, in personal finance, the term ‘investment plans’ is linked by many as the same as the long-term investment plan. However, one could opt for investments for short-term goals as well. For example, you could opt to invest for goals such as going on a vacation, paying back a short-term loan, buying a phone, purchasing a bike, etc. To achieve the aforementioned short-term goals, you require a financial plan.
Financial planning involves putting together an investment plan for managing money over short periods. You need to look at what kind of investment instruments are suitable for short-term goals and also ascertain how to select those products to help you achieve your near-term goals.
Short term goals: How to prioritize them?
It is possible to categorise all one’s short-term goals into two parameters. Namely:
- The tenure of the goal
- The importance of the goal
For instance, it is possible to segment goals that are one week to 3 months away as emergency goals. Those goals which are 4-12 months away can be ultra-short goals. And then you can have short plans which extend from 1-3 years.
Different types of short-term goals
|Emergency||0-03 months||Sickness, home repairs and essential purchases|
|Ultra-short||04-12 months||School fees, expensive gadgets and advance tax|
|Short-term||01-03 years||Instalment for home or vacation|
After classifying your goals as emergencies, ultra-short, and short-term goals, apply a layer of importance on top of each goal. For instance, goals like an emergency fund, school fees, loan instalments, etc., are crucial. On the other hand, a vacation or an expensive phone can wait and are not that important. While planning for short-term goals, this segmentation between time and importance can be helpful. As a thumb rule, the closer you are to your goals, and the more critical those goals are, the higher your allocation should be to those instruments.
Selection criteria for investment products:
While choosing an investment tool for your short-term goals, there are three areas on which you should focus. The first one is the safety of the capital, i.e., the investment tool should not come with any speculative or unknown risks. The second factor you should look at is liquidity. It means it should be easy for you to redeem your investments instantly as and when required. Thirdly, you need to consider the return potential against other comparable investment options.
First factor: The safety of the capital:
If you are considering investing to accumulate wealth you need to remember that every investment carries some degree of risk. For example, with mutual funds, the risk is the up and down movement of the NAV i.e., net asset value. The same can be said about banks. In the case of banks, it is the extreme and rare case of a collapse that can affect some part of your savings and fixed deposit balance.
Second factor: Liquidity:
The second factor you should consider is liquidity, i.e., the ease and speed at which you can withdraw your investments. For example, one of the fastest modes of accessing your money is a bank savings account. That’s because, they allow for online transfers and cash withdrawals over an ATM, bank branch, and even a point-of-sale terminal. And that’s where a good part of your emergency fund can go. Apart from bank accounts, the second most accessible mode is a type of debt fund called a liquid fund. Some funds in this category allow instant redemption up to a specific limit and in addition, you can earn better returns than a savings account.
Third factor: The return potential of investment tools:
The third and final selection criteria you need to look at are the returns. Usually, what people typically look for is a better return than what a regular savings account or a fixed deposit might offer. However, it is important to note that the returns on most debt instruments are dependent on the interest rates set periodically by the Reserve Bank of India.
In simple terms, the three critical factors are safety, accessibility, and return ability. The money you have allocated for goals like your emergency fund, school fees, etc., should be invested or kept in only those instruments which have minimal risk. If you are having doubts, you need to seek financial advice from a professional.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.