6 Easy Investment Ideas for Short Term Goals | Udayan Adhye

Summary

In this video, financial expert UD Adad discusses investment options for achieving short-term financial goals, such as buying a car, going on vacation, or paying for education. He explains the risks and benefits of various options, including equity savings mutual funds, conservative hybrid funds, fixed deposits, and arbitrage funds. By focusing on tax implications, return rates, and safety, UD offers practical advice on how to optimize investments for different time horizons, from 90 days to several years. He emphasizes the importance of choosing the right fund based on your tax bracket and investment goals.

Takeaways

• 😀 Consider investing for short-term goals like vacations, car purchases, or education, where you need to balance risk and return.
• 😀 Equity mutual funds are generally not ideal for short-term goals (3-4 years) due to higher risk and potential for negative returns.
• 😀 Instead, consider equity savings mutual funds or conservative hybrid funds, which combine stocks, bonds, and arbitrage for more stability in the short term.
• 😀 Equity savings mutual funds have low risk, but you should be aware of the slight volatility, especially during market crashes like in 2008 and 2020.
• 😀 Conservative hybrid funds, which invest a portion in equities and the rest in bonds, have lower risk and have performed well even during market downturns.
• 😀 Taxation plays a key role in investment choice. Equity savings funds are taxed like stocks, which is beneficial for those in higher tax brackets.
• 😀 Fixed deposits and recurring deposits are safe but offer low returns, and the interest earned is subject to taxation at your income tax slab.
• 😀 Small finance bank fixed deposits offer slightly better interest but may not be worth the extra effort to optimize returns for small amounts.
• 😀 For very short-term goals (less than 90 days), consider keeping money in a high-interest savings account or investing in short-term debt funds.
• 😀 Arbitrage mutual funds can offer consistent returns with minimal risk by exploiting price differences in the spot and derivative markets, and they are taxed more favorably than debt funds.
• 😀 Short-term debt mutual funds are another option, though they are taxed based on your income tax slab, which may reduce returns for high-income individuals.

Q & A

What are some common short-term financial goals mentioned in the video?

The video discusses several short-term goals like going on a vacation, buying a new car, purchasing a house in the next few years, saving for higher education, or funding a wedding.

Why are stocks or equity mutual funds not ideal for short-term investments?

Stocks and equity mutual funds carry higher risks over short periods. The likelihood of losing money increases when investing in the stock market for just 3 to 4 years, as the market can be volatile in the short term.

What are Equity Savings Mutual Funds and why are they recommended for short-term goals?

Equity Savings Mutual Funds invest in stocks, bonds, and arbitrage opportunities, with a low allocation to equities. This reduces the risk while providing some growth potential. They are considered safer for short-term investments due to their diversified nature and moderate risk.

What is the average three-year return for equity savings funds in India?

The average three-year rolling return for the five largest equity savings funds is about 11.8%.

What happened to the equity savings funds during the Covid crash in 2020?

During the Covid crash, equity savings funds dropped by about 4% for one month. However, this was much lower than the broader stock market's fall of nearly 40%.

How are conservative hybrid funds different from equity savings funds?

Conservative hybrid funds invest about 10-25% in stocks and the rest in bonds, providing a balance of growth and stability. Equity savings funds, on the other hand, focus more on arbitrage and stocks but with a lower risk exposure.

What is the tax treatment for equity savings funds versus conservative hybrid funds?

Equity savings funds are taxed like stocks, with tax-free gains up to ₹1 lakh per year, and a 10% tax on profits beyond that. Conservative hybrid funds are taxed at your income tax slab if sold within 3 years, and at 20% with indexation if held longer than 3 years.

What are the advantages and disadvantages of fixed deposits (FDs) for short-term goals?

FDs are safe and predictable, but their interest is taxed at the individual's income tax rate, potentially reducing returns. They are also inflexible, as breaking the FD early may incur penalties.

Why might one prefer Arbitrage Mutual Funds over short-term debt funds for short-term goals?

Arbitrage Mutual Funds are taxed at a flat 10% after one year, whereas short-term debt funds are taxed based on your income tax slab. For higher tax brackets, arbitrage funds are often more tax-efficient.

What is an example of an Arbitrage opportunity used in Arbitrage Funds?

An example of an arbitrage opportunity is buying apples at a lower price in one market and selling them at a higher price in another. Arbitrage funds take advantage of price differences between the spot and derivatives markets.