A mutual fund is an investment that pools investors' money to purchase securities in the market, often a range of securities. The mutual fund investment benefits include professional management and a diversified portfolio. However, the effectiveness and gains of mutual funds for short-term goals are debatable. This article discusses whether mutual funds are suitable for short-term goals given the risks involved, returns expected, and liquidity.

Understanding Mutual Funds

Mutual funds are also known as investment funds and are managed by fund managers. The purpose is to generate revenues for the investors. Further, there are various types of mutual funds, such as equity funds, bond funds, and money market funds, with the risk and return on each of them being different.

Risk and Return

Concerning short-term objectives, risk is one of the most important factors that should be taken into consideration when investing in mutual funds. Take, for instance, equity mutual funds, which can be quite unstable. This means that the stock market can greatly rise or plunge depending on several factors. On the other hand, bond funds and money market funds are less risky but they yield lower profits. Selecting mutual funds for short-term investments requires a proper trade-off between the level of risks and the expected returns.

Liquidity

Liquidity in this context represents the ability to transform an investment into cash without price change in the market. The mutual fund has moderate liquidity, particularly the open-end mutual fund can be purchased and redeemed at the end of each trading day at Net Asset Value (NAV). That being said, early withdrawal of mutual fund investment has exit loads or penalties which may not work for short-term financial plans.

Time Horizon

The investment time frame is fundamental when it comes to short-term investment using mutual funds. Short-term is generally understood as a period of not more than three years. This is a very short period in which the market’s ups and downs can greatly impact returns. As we know, equity funds are generally more risky than saving funds, but yield higher returns and hence, are not suitable for short-term goals. Money market funds and bond funds are steadier and better for short-term objectives.

Conclusion

Therefore, equity mutual funds like Axis Mutual Funds can be good investments provided that they are not suited for short-term investments. This aspect of risk and return makes equity funds more suitable for long-term investment. If the goal is short-term and priority is given to safety and liquidity, then bond funds and money market funds are suitable. However, there are other investment opportunities like saving accounts and fixed deposits that might afford the required stability and flexibility. As such, investors should consider their risk appetite, time horizon, and financial objectives when investing in mutual funds that are meant for short-term use.