The Long and Short of Investments

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

An emergency fund should be a part of your risk management and hence must be the first step while initiating your investment process.

A goal-based investment process ensures that you achieve consistent investment success. That’s because this approach helps you establish investment goals to be achieved over short, medium and long-term time horizons. Unfortunately, when it comes to execution, many investors ignore short-term goals like creating an emergency fund, planning for a family vacation, buying a car, buying a gift for a family event, paying an insurance premium etc., thinking that these can be managed by making a few adjustments here and there in the portfolio.

However, when the time comes to provide for them, many of them flounder and often end up interrupting their investment process. Clearly, ignoring short-term investment goals can derail your wealth-creation process. Then, there are investors who do provide for short-term goals but create a pool of investments despite having a time horizon ranging from say a few months to a couple of years for different short-term goals. This strategy not only results in an overlap in terms of how the funds are utilised but also in compelling them to compromise on returns.

Remember, short-term goals offer a series of milestones – a step-by-step approach that allows you to keep your focus on long-term goals. Simply put, short-term goals give you a clear plan to grasp what may otherwise seem impossible. One of the most important short-term goals is to create an emergency fund. An emergency fund should be a part of your risk management and hence must be the first step while initiating your investment process. An emergency fund is needed not only to take care of anything unexpected that may come along, but also to allow you to continue your long-term investment process uninterruptedly. Above all, it gives you peace of mind.

While it is important to have an emergency fund in place, you must ensure that that it is sufficient to cover at least six months’ expenses and is liquid enough to access it anytime. This money can be parked in traditional options like bank deposit as well as market-linked products offered by mutual funds like liquid funds and ultra short-term income funds that have the potential to offer higher returns than bank deposits without compromising much in terms of liquidity and safety. If you are one of those investors who haven’t yet created an emergency fund, you must make it a topmost priority to initiate the process of doing so.

It would be apt to also assign a time horizon to your other short-term goals. Mutual funds have an important role to play even for other short-term goals as they offer options for any time horizon and risk-profile. For a time horizon of 1-2 years there are options like low duration and short duration income funds. Then, there are arbitrage funds that can be suitable for investors in a higher income group. Arbitrage funds provide tax-efficient returns as short-term capital gains on units redeemed within 12 months are taxed at a flat rate of 15 per cent and long-term capital gains on units redeemed after one year are taxed at 10 per cent.

Another stage of your investment process that requires a clear short-term investment strategy is when one of your long-term goals like children’s education is about to complete its time horizon. It would help if you realign the portfolio 1-2 years before the completion of such a time horizon to protect the gains as well as have the required liquidity. Similarly, if the goal is retirement planning, you must realign the portfolio to convert it from being growth-oriented into one that can produce a combination of regular income as well as growth to meet current expenses and stay ahead of inflation. There are hybrid funds like equity savings funds, dynamic asset allocation funds and equity-oriented hybrid funds that can be considered. The combination will depend upon the quantum of regular income required, size of the portfolio and your risk profile.