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Why investing in good short-term debt funds can be great for your equity investments.

The answer lies in “not needing the money NOW”. Have you noticed how you tend to worry less about money when you have more than enough of it? The feeling when you receive your salary versus when you are nearing month end is quite different.

Have you ever sold something worth crores for lakhs or worse thousands? Would you? If it sounds absurd, think again. Many billionaire families have lost their fortunes by doing exactly this. 

We spoke about the follies of “booking profit” in an article on the Scripbox blog. Considering how the markets have performed recently, there is a need to talk about protecting your wealth by ensuring that the only reason you ever take money out of your equity funds is because you plan to as your goals are near and not because of market ups and downs.

Your emotions can rule you

Your equity investments need time to grow and to withstand the periodic volatility that affects markets. This is a common statement made about equity investments. From an investor’s perspective, this is not as easy to implement.

We are all emotional creatures, some more than others. The ups and downs of markets can be hard to stomach. This is especially so when your investments are beginning to approach levels that are significant percentages of your goal amounts. You naturally want to protect your money. To you as an investor, your investments are a result of your sweat and labour and you don’t want them to go down suddenly because of choppy markets.

Logically, you do understand the importance of staying invested for the long run but your fingers move towards the exit button as soon as you feel the markets are reducing your investments. We have shown earlier how investors who stay invested stand to gain much more rather than those who decided to exit at the wrong time.

How to make sure you stay invested?

The answer lies in “not needing the money NOW”. Have you noticed how you tend to worry less about money when you have more than enough of it? The feeling when you receive your salary versus when you are nearing month end is quite different. 

If you want to give your equity investments room to grow to achieve your long term goals, then you need to find a way to not need the money you invest in equity, immediately. The simplest way to ensure that is to have “enough” in something that doesn’t fluctuate or is exposed to any major losses, even temporarily.

Enter short term debt funds

Certain kinds of debt funds can be invaluable tools for protecting your wealth from both circumstances and your own emotions. Shorter duration debt funds with a focus on credit quality, are your tool of choice. 

Low volatility fixed income investments such as liquid funds and short duration debt funds will ensure that you never dip into your equity investments unless you have reached your goal amount. 

A good way to arrive at the required amount is to combine what you need in your emergency fund with all your requirements, that might come up in the next 3-4 years. This should account for important goals such as the money you will need for your child’s education plans as well as for any loan repayment commitments. You can also include optional goals such as a foreign vacation, if you can afford to.

What is enough?

This number will vary and can be as high as four years of expenses for some people. It will include your emergency fund, and then some.

A good way to arrive at the required amount is to combine what you need in your emergency fund with all your requirements, that might come up in the next 3-4 years. This should account for important goals such as the money you will need for your child’s education plans as well as for any loan repayment commitments. You can also include optional goals such as a foreign vacation, if you can afford to.

The result

When you know you have enough saved up in fixed-income based investments, you are much less likely to be affected by market movements and really take the long view. In some ways, it’s the experience of being rich before truly becoming so.

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