Know Which Investment Mode You Should Choose Depending on your Investment Horizon

No matter how new or how old an investor you are, knowing which investment mode to put your money in comes with its share of confusions and uncertainties.
The aim of this article is to give you an idea of the investment types that you can put your money in depending on time frame you wish to remain invested in.
Investment Period Lower than 1 year:
In case your aim is to invest your cash in an invest mode just for a few months, look at liquid fund investment options or short term debt mutual funds. If you need returns in less than 6 months, opt for liquid funds. In case you can’t wait for 6 to 12 months, go with ultra-short term debt fund type. The ultra-short term funds get you somewhat higher returns than the liquid fund type but then again, they might be volatile in extra short term, i.e. one to three months.

Investment Horizon

There are some ultra-short term debt funds that charge a very small amount of exit load somewhere around 25 bps for the redemption within one month.
Both liquid and ultra-short term debt mutual fund type can offer pre-tax returns ranging between 9 to 10 percent as compared to 4% interest of savings bank. The withdrawal from liquid fund type is generally processed in less than 24 hours.
Therefore, in addition to the funds that you require for everyday expenses and contingencies lying in your savings account, you should keep the surplus cash in the other than the funds that you need for your day to day expenses and an amount for contingency ultra-short term debt or liquid fund.
Investment Period between 1 and 3 Years:
In case you have the advantage of one to three year in hand, you should definitely invest in either the Fixed Maturity Plans (FMPs) or the Short term income funds. FMPs are those close ended schemes which aim to earn high income for investors in a fixed term. 
In the past one year, the best performing FMPs are known to have offered much better return on investment than the bank FD, even when you are looking at a pre tax scenario as they come with indexation benefit on the taxes. In addition to this, the FMP investors should know that because FMPs are a close ended scheme, there is no liquidity before fixed term.
If you give an important consideration to liquidity, then you should choose an open ended short-term income fund. However, you should know that the returns between short term income fund and FMPs is always in favour of the FMPs.
In the end, in case you have fixed time range and a fix minimum return on the short term investment with no liquidity risk before redemption of fund, you should 100% opt for FMP. But, if you think you are a lot more flexible in terms of investment horizons, short term fund would be a much better option. In an environment dominated by high interest rates, FMPs are   the best option as you get to clock high yields. However, if you are a part of an environment where the interest rates are lowering, go with short term income funds.
Investment Period of 3 years and more:
If the investment period that you are aiming for is 3 years or more and the risk level is fairly low, go with intermediate debt funds or long range debt funds. And in case you have high risk tolerance, go with month based investment plan. With monthly investment mode like SIPs in debt funds, you will be able to maintain small allocation in the equity instrument. This fund type is best for retirees who are on a lookout for fixed, constant income from investment in addition to capital appreciation.
Balanced funds are usually most suited for the investors who have an average appetite for risk and are willing to keep doing investment for a five to ten year time period.  These funds have 60% to 70% of its portfolio invested in the equities and remaining in the fixed income security. These funds are better suited to investors who are looking for high capital appreciation without looking at the substantial risks associated with the invested capital.
The next fund we are going to look at is Equity Fund. This fund type is best suited for the investors who are around 5 or 10 years away from retirement or some long form finance objective. When thinking of this fund type, know that the associated risk factor will be high – something  that usually occurs when you aim for high returns. So, if you are okay with taking risks, go with this fund type. 
The best performing equity based funds are known to give more than 20% returns to the investors. This fund type is best suited for the long period finance planning such as children’s education, marriage, your retirement, house buying etc. Even within equity based funds, there are a number of investment choices ranging from large capital funds, ELSS, diversified equity funds, thematic funds, and small, mid-cap funds. The options are so varied that it is not uncommon for an investor to get confused.

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