Published on April 28th, 2025
In India, both children and adults often set aside money for short-term goals, such as buying a new bicycle, planning a family outing, or funding a school project. You plan to achieve these short-term goals in one to three years.
One way to grow your hard-earned money is by investing in mutual funds. But is it a good idea to use mutual funds for short-term goals?
This article will explain mutual funds and whether their risks are worth it or not. So, let’s get started:
What are Mutual Funds?
A mutual fund is an investment platform that collects money from multiple investors and invests it across a range of financial assets like stocks, bonds, money market instruments, gold, and other securities.
Investment experts manage mutual funds, allocating them to investors in order to produce income or capital gains.
Through mutual funds, small and individual investors can access professionally managed stock, bond, and other securities portfolios. As a result, each shareholder participates evenly in the fund’s profit or loss.
Why Mutual Funds Might Seem Good for Short-Term Goals
Here are some of the reasons why mutual funds is a great choice:
1. Better Earnings Than a Bank Account
Most people in India save money in a bank account for short-term goals. Bank accounts are safe but give tiny interest, like 3% yearly. If you have ₹5,000, you might earn only ₹150 in a year.
However, using a lumpsum calculator, you can compare how different investment options, like mutual funds, can offer higher returns.
For instance, mutual funds, especially safe ones, can sometimes give up to 12% returns. That means ₹5,000 could grow to ₹5,600 in a year.
2. Safe Options for Short-Term Needs
Not all mutual funds are risky. In India, some mutual funds, like debt or liquid funds, are safer because they invest in government bonds or short-term loans to strong companies.
These don’t jump up and down in value as much as stock funds.
Plus, they’re designed for short-term goals, making them less likely to lose money. This makes them tempting for quick plans.
3. Simple to Use
Starting a mutual fund investment requires minimal effort from beginners. Starting from as little as ₹500 enables you to invest in mutual funds and continue adding money whenever you receive more cash.
The ability to withdraw at any time makes mutual funds suitable for achieving short-term goals. The fund manager selects investments on your behalf, and you need no expertise in finance to participate in this system.
Why Mutual Funds Can Be Risky for Short-Term Goals
Below are the reasons why mutual funds can be a risky investment for short-term goals, especially when you open demat account without understanding the associated market fluctuations.
1. Money Might Shrink
Even safe mutual funds can lose value on some days. Imagine you invest ₹5,000, but a market hiccup makes it drop to ₹4,900.
Unlike bank accounts, where your money is safe, mutual funds can be unpredictable. So, they’re not always the best for short-term plans.
2. Fees Eat Your Profits
Mutual funds charge a small fee for managing your money. For example, if your fund earns 12% but costs 1%, you only get 11% profit.
For short-term goals, where you invest for just a year or two, these fees can take away a big chunk of your earnings. Also, this makes mutual funds less attractive compared to no-fee options like fixed deposits.
3. Waiting for Your Money
When you want your money back from a mutual fund, it can take a couple of days to get it. For instance, if you need cash for a family outing next week, the delay might cause trouble.
Bank accounts let you take money out instantly, which is better for urgent needs. Therefore, mutual funds might not work if your goal is super close.
Tips for Using Mutual Funds
If you want to try mutual funds for short-term goals, pick safer ones like debt or liquid funds.
Use money you don’t need immediately, and keep some savings in a bank account for emergencies. Also, talk to your parents or a trusted grown-up before investing to make sure it’s a smart move.
Conclusion
Mutual funds seem appealing as a convenient savings method in India for growing short-term savings because they offer potentially higher returns than a typical bank account.
Mutual funds offer benefits yet present potential dangers that include value decreases, charges, and delayed monetary withdrawal.
Short-term objectives should primarily use bank accounts and fixed deposits due to their higher safety levels.
Fortunately, mutual funds present an option if you agree to expose your savings to some degree of risk by selecting risk-averse investment opportunities.
