Stock markets provide the highest possible returns among all asset classes in the long term. If you have time on your side and can stay invested for a long duration, investing in equity is the best bet. But what about short term?
Where should you invest if you can spare your money only for a few years?
Can the stock market be your friend in such a scenario?
First let’s understand what is meant by short-term goals. When you are investing for something in the not so distant future, like buying a car in 3 years or an exotic vacation next year, in other words when you have a limited time frame (less than 5 years), it is considered short term.
Now, selecting an investment vehicle for near future goals is always tricky. Invest in stock market and you might lose the money in its fluctuations or keep it in a savings account and you will not be able to beat inflation. So how to achieve that goal?
Well, it’s not as difficult as it seems, there are many investment options available for short term as well. But first of all you need to understand what type of goal you have in mind.
Every goal falls under two categories, critical and discretionary.
- Critical goals are the ones which are important and life altering, you can’t afford to avoid or delay them, nor can you afford to take chances with them. For example: Your child is going for higher studies in a year, and you need at least ₹5 lakhs a year to fund that education. Here you have a fixed time frame and amount. You know you have to arrange ₹5 lakhs within a year for this goal. Any shortfall or delay can affect your child’s future.
- Discretionary goals are those which are good to have but are not life altering. You can easily postpone or change this goal depending on the circumstances. For example: buying that latest gadget, or going on a vacation next year. You can easily extend the timeline of this goal, by few months or even a year. You can also afford a shortfall in these types of goals. Like if you want to buy a car in two years, and need around ₹8 lakhs for the same. Now, if in the decided time frame you were able to accumulate only ₹6.5 lakhs you can still find a perfectly fine car, or you can extend the timeline and wait till you have the desired amount.
For discretionary goals you can invest in equity markets. This is because even if the market falls, you can postpone the goal. Just keep in mind that if you withdraw your equity investment within a year, you are liable to pay short-term capital gains tax, along with applicable exit load charges.
For a short term critical goal, investing in equity market is a bad idea. Stock market is too volatile in short duration, one dip and all your money is gone. You just can’t afford to take such kind of risk for critical goals, therefore it’s better to opt for conservative portfolio here. Safety and liquidity are of utmost importance in short term even if that means losing returns. Here the primary objective is safety of capital and not capital appreciation.
Since earning higher returns is not the priority here, you need to understand that you need to invest large amount to achieve that goal. The easiest way to achieve a short term goal is to save regularly. Be realistic about what you can really afford and set an achievable target date, and then start cutting back on non-essential expenses. Reduce spending on things that fall under the category of wants as opposed to needs. You’ll be surprised how saving money here and there can really add up. Eating out less often, cancelling subscriptions that you don’t really need, or memberships that you don’t really use, etc. Basically make a detailed list of what you spend on in a month and decide where you can afford to trim.
You can also use this calculator to find out how much you need to save/invest to achieve your goal.
Once you have accumulated enough, start investing that corpus in a suitable investment vehicle. Choice of investment will depend on your time frame. Here are my recommendations:
|Time Horizon||Investment Vehicle|
|3 - 4 months||Liquid Funds|
|5 months - 1 year||Ultra Short Term Funds|
|1 - 2 years||Short Term Funds|
|2 - 4 years||Debt oriented Hybrid Funds|
|4 - 5 years||Balanced Funds|
Also, keep in mind that taxation is heavy when short term investments are considered. In most cases short-term gains get taxed on your personal income tax rate, so if you fall in the highest tax bracket the impact can be substantial.
Clearly achieving short term goals is not impossible but yes it can be tricky. Therefore it’s always best to plan well in advance so that you have time on your side and you can grow your capital more comfortably.