Depending on the time in hand before your planned vacation, you have the option to choose from liquid funds to ultra-short-term funds.
Traveling to an exotic destination is everybody's idea of a dream vacation. From booking your flight tickets to finding the best accommodation, going on a dream vacation requires meticulous planning of your finances which can be quite exhausting. Well, do not worry. Mutual funds can be your financial stress busters.
Investing in mutual funds is very much similar to investing for any other financial goals. All you have to do is choose the right mutual fund based on your time-horizon. Depending on the time in hand before your planned vacation, you have the option to choose from liquid funds to ultra-short-term funds.
If you have a vacation planned three months down the lane and are worried about the market risks that come with investing in mutual funds, liquid funds could be the best bet for you. They are low-risk havens which primarily invest in short-term fixed income, generating money market instruments with a lower maturity period of up to three months. These funds generate higher returns when compared to other conventional modes such as a savings account. In the same line, they also provide high liquidity and also keep the capital investments safe.
In case you have planned your vacation, say six months from now, you can consider investing in ultra-short-term mutual funds. These funds are very much similar to liquid funds which invest in fixed-interest earning market instruments but with an extended maturity period of up to 6 months. These funds generate higher returns compared to liquid funds by investing in low-credit rating money market instruments.
Even if you have your vacation planned one to two years down the lane, sticking to ultra-short-term funds would be a wise idea. Switching to short-term funds will attract additional risk as they primarily invest in debt instruments with maturities from one to three years. The longer the maturity period, the higher risk your scheme will attract. Though ultra short-term funds invest in debt instruments, the risk is controlled as the maturity period ranges between three and six months.
While there are a lot of us, who'd prefer using a credit card to fund his/her vacation, let us understand how investing in mutual funds through SIP is a wiser decision when compared to utilising your credit card to fund your vacation.
SIP vs EMI
Let us assume that you fund your vacation through your credit card and switch the repayment to an EMI plan with an assumed interest rate of 14 percent p.a. spread over 12 months. Suppose you had spent approximately Rs 85,000 on your card planning your holiday, then you would end up repaying an EMI of Rs 7,362 per month, bringing the total amount payable to Rs 91,583 during the year.
Now, if you had planned your vacation earlier, say one year before you decide to invest, you would only have to invest Rs 6,800 per month as SIP to accumulate Rs 85,000 you would need for your vacation. Assuming the interest applicable on the SIP to be at least 7 percent p.a., you would only be required to make a total investment of Rs 81,840 to turn the future value of your SIP investment to Rs 85,010. You would also have saved around Rs.10,000 which could be utilised to take care of unexpected expenses.
In short, investing in mutual funds can be the best possible way to fund your planned holidays. All you have to choose the right mutual fund scheme based on your time horizon and risk appetite.(The author is founder and chief executive officer of Cleartax. Views are personal) The Great Diwali Discount!
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