The conversation around mutual funds is often led by equity schemes and systematic investment plans for long term wealth creation. However, there are a variety of mutual fund schemes and wealth creation is not the only purpose this form of investing helps in. Equity funds help you create wealth but there are others that help you preserve it.
Along with earning returns, products that are relatively low risk or where returns are not volatile will also keep capital safe.
These funds are from the liquid fund and ultra-short term fund categories. You can use their unique features of low risk and stable returns to build the portion of your financial portfolio that caters to capital preservation.
Traditionally, investing is about creating wealth. Wealth creation, however, does come with short term risks of volatility. This means you cannot invest that portion of your money that you want to keep safe. There is a portion of our money, for example, the part that gets put into bank fixed deposits or the excess in our bank savings accounts, money in national savings certificates and other kinds of small savings schemes, which can’t be subjected to the risk of volatility.
It may be that you need the money for a car down payment in a month’s time or paying school fees after two months or just for your planned vacation in six months. Whatever your use for the funds, you can’t afford to lose capital.
This amount can be invested in select liquid funds. Low volatility in the product returns, helps you preserve your capital, at the same time you continue to earn some return for the period you are invested. The biggest advantage is that you do not have to define your period of investment and get the flexibility to withdraw whenever you want to.
Sometimes, amounts allocated to liquid funds don’t end up getting utilized, it’s a simple task then to move these funds systematically into long term investment options or funds that can enhance your return if you remain invested for longer.
If you have been invested for a while and are nearing the completion of some of your long-term goals, a portion of your portfolio will need the umbrella of capital safety. In other words, you will need to preserve the wealth you have created so far. Here too you can switch the portion you need for your goal, closer to completion, to a low-risk fund like a liquid fund.
Sometimes, amounts allocated to liquid funds don’t end up getting utilized, it’s a simple task then to move these funds systematically into long term investment options or funds that can enhance your return if you remain invested for longer. You may choose to move it to debt or equity funds depending on your needs.
When capital preservation is your priority over high returns, don’t think that bank fixed deposits are your only option. Try out the flexibility, stability and ease of transacting in liquid funds the next time you want to park your money in a safe investment option.