Short-term mutual funds investment strategy

Here Is Short-Term Mutual Funds Investment Strategy for Businesses

When was the last time you bought a refrigerator?

Do you remember how much effort was made to find the best refrigerator? You first identified various things you want in your refrigerator, then you researched and found all the options that covered those needs, then you compared all the alternatives and finally bought the one that was the best fit for your home. 

Imagine if buying a new refrigerator requires so many strategic decisions then what will it take to invest your hard-earned cash into financial instruments like mutual funds? 

A common misconception amongst businesses is that they need to reinvest all the profit back into their own business or let it sit idle. But do you know that you can earn 4-5% returns annually by parking your idle cash in mutual funds over weekends and holidays? Thinking about the statutory warning, “mutual fund investments are subjected to market risk.” ? Don’t worry about that, here we bring you a foolproof strategy to invest in mutual funds for the short-term and make money off of your business’s idle cash-

Steps To Building Full-Proof Strategy For Short-Term Mutual Funds Investment:

Decide the Duration: 

The duration for which you can keep your money invested helps in defining your investment strategy – short term or long term. Businesses generally have idle cash in their accounts between payrolls, during weekends and holidays, hence business owners can look for short term investment instruments and grow their profits.

Select The Right Mutual Fund Option:

Based on the duration for which you can keep your idle cash parked, go for the mutual fund investment options. For example, for your short term investment goals, you can choose from a range of short term mutual funds like overnight funds, low duration funds, liquid funds, ultra-short-term funds, etc. 

Here are the three determining factors while selecting the right mutual fund:

  • Safety: 

Every mutual fund instrument carries a certain risk. When a business decides to invest in a mutual fund, it is important to consider the extent and practicality of that risk. As a decision-maker, you would want to invest your capital in a financial instrument that has comparatively lower risk. Reviewing the fund’s performance for the past few years can help you understand the percentage of negative returns of the funds. You can choose the funds with minimum negative returns to ensure the maximum safety of your investment. 

  • Liquidity:

Liquidity of mutual funds refers to your ability to pull out the investment when you need the funds. 

  • Returns: 

The main goal of investing your idle cash is to earn returns. Short term mutual funds like debt mutual funds offer a set rate of interest to the investors. Debt mutual funds can be a good source of generating steady returns on surplus capital. 

Short-term mutual funds investment strategy

Weigh All Of Your Alternatives: 

While selecting mutual funds, you will find multiple options. You need to carefully weigh the different options to find the best mutual fund investment option. You can weigh the options as per the following criteria:

  • Expense Ratio

The expense ratio is the fee charged for managing the mutual fund portfolio. 

  • Rate of Past Returns

It refers to how much returns the funds received in the past. 

  • Credit Rating:

For debt funds, every fund is assigned a credit rating which is based on the risk of default by the entity.

  • Risk Appetite

As we all know, mutual funds are subjected to market risk. However, the level of risk is different in different mutual funds. Equity mutual funds are quite risky. On the other hand, debt funds are comparatively less risky. 

  • Modified Duration

In the case of short term mutual funds and debt funds, there are two types of bonds that investors can invest in, zero-coupon bonds and vanilla bonds. Zero-coupon bonds pay both the principal and interest upon maturity. On the other hand, vanilla bonds pay interest regularly. Modified duration is the percentage change in the bond’s price for the percentage change in the interest rate. It is the price sensitivity of a bond. To ensure minimum interest rate risk in investment, investors can invest in the low duration mutual funds. 

  • Yield To Maturity (YTM): 

Remember, Higher YTM= Higher Risk

Yield To Maturity is the rate of interest that an investor will get when he will hold the fund till maturity. Suppose if the interest rate of the instrument is 10% and the maturity period is 2 years, you will get 10% by the end of 2 years given there are no changes in the portfolio.  As a business owner, if you are looking to invest safely, you shouldn’t run after the funds with higher YTM. Even though it might be extremely tempting to invest in the funds with high YTM, these funds may be taking a comparatively higher risk to achieve such a high Yield To Maturity. 

Monitor And Analyze The Performance Of Your Investments:

You can sleep peacefully knowing that you have invested your money the right way. However, it’s also equally important to keep monitoring and analyzing the performance of your short-term mutual fund investments. This will help you to make the right investment decisions in the future and help you in avoiding the mistakes that you might have made in your current investment. 

Short-term mutual funds investment enables SMEs and MSMEs to boost their profits using cash which generally sits idle in their bank account. Short-term mutual funds are mostly debt instruments and they are much more secure than equity funds. An important factor that businesses should consider while investing in mutual funds is diversification. Allocating all the capital in a single instrument can be risky and also yield minimum returns. Therefore, while investing in mutual funds, businesses should consider investing in different types of short-term mutual funds depending on the investment duration, fund’s liquidity, modified ratio, average maturity period, etc. 

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  • View aggregated cash flow across multiple business accounts.
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    With Shootih, businesses can get a 360° view of different mutual fund holdings and invest in their preferred mutual funds with a single click. The otherwise complicated process of finding the right mutual funds investment platform and then investing in the appropriate mutual funds has become quite simple with Shootih. 

    Businesses can manage their wealth and invest their idle cash in just a few simple clicks with Shootih. 

    To know more about how Shootih work, book a free demo call with us.

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