How to fund your vacations with mutual funds
Vacation is a non-negotiable goal like retirement, children's education, and so on, for many individuals these days.
“Planning a vacation is usually a short-to-medium time goal. Investors should choose a mutual fund scheme on the basis of the time in hand. For an instance, if your vacations are less than three months away, you should strictly go for liquid funds. If you have more time, you should invest in ultra-short term funds,” says Jitendra Solanki, founder, JS Financial Advisors.
Investors who want to stay extra conservative for their investments towards a vacation goal, staying with liquid funds is a better idea, say mutual fund advisors. They say ultra-short term funds can still take a bet on a lower credit rating instrument in order to generate higher returns than liquid funds.
“Apart from time horizon, flexibility level also matters. If you are not flexible enough to go early or postpone your vacations based on the performance of your funds, and reaching your desired goal corpus, you should better stick to liquid funds,” says Swapnil D Kendhe, founder, VivekTaru.
What if your vacations are one to three years away? Well, mutual fund advisors say it is wise to stick to ultra-short term funds as short term funds will carry extra risk.
“It makes sense to stay with ultra-short term funds even if you are planning a vacation in one or two years. This is mainly to avoid the risk. Short term funds invest in debt securities with duration between one and three years. Higher the duration, higher is the risk involved in the scheme,” says Solanki.
Ultra short term funds invest in debt securities with duration between three and six months.
Kendhe says people who are planning vacations in three to five years can go for some percentage of around around 10-20 per cent in equity savings scheme or balanced advantage fund. “The only condition is you should be flexible with your vacation timing,” says Kendhe.
“These schemes can help add a small component of equity in a conservative manner. But the main idea is to get a better taxation,” says Solanki.
Equity funds are taxed at 10 per cent without indexation on long term gains exceeding Rs 1 lakh in a financial year.
What about the risk of downgrades and defaults?
Mutual fund advisors say the risk of defaults and downgrades has always been there. That is why they ask people to stick to shorter end of the maturity of an established fund house. “You must make sure that you are buying funds of a reputed fund house to lower the probability of risk going bad. Also you can avoid funds which are taking a higher than usual risk to generate higher returns than their peers,” says Kendhe.