We often associate mutual funds with long-term wealth creation, i.e., 5 years, 10 years, or even more. But what can you do if your investment horizon is short? Say, just 12 months. You might be saving for a goal that’s just around the corner: a destination wedding, a gadget upgrade, or an emergency buffer. The question then arises: Is it even worth investing in mutual funds for just one year? Can they give you decent returns in such a short period?
This article covers all the details on whether mutual funds can deliver good returns in one year and which funds can be selected.
Understanding 1-Year Mutual Fund Investments
Mutual funds are mainly in these 3 categories- equity, debt, and hybrid funds. For a one-year time horizon, the focus typically shifts toward funds with lower volatility, such as debt or hybrid funds. Equity funds, while capable of delivering high returns, are subject to significant market fluctuations and may not be ideal for short-term goals.
You can start a SIP (Systematic Investment Plan) even for a year. While SIPs work best over the long term, there’s nothing wrong with trying them out for a year, especially in debt or hybrid funds.
If you’re exploring options for the best SIP for 1 year, you might want to consider funds like liquid, arbitrage, or ultra-short duration schemes. These can help you build a habit of investing, earn slightly better returns than your bank account, and test the waters without too much exposure.
Which Mutual Funds Are Suitable for a 1-Year Horizon?
When it comes to short-term investing, the type of mutual fund you choose matters more than anything else. Here are the options that generally work well for a one-year investment period:
1. Liquid Funds
These are designed for very short-term investments, typically up to 3–12 months. They invest in low-risk debt instruments like treasury bills and COD or commercial paper. Returns usually range from 4% to 6%, depending on interest rate movements.
2. Ultra-Short Duration Funds
These funds are slightly riskier than liquid funds. They invest in debt instruments with a maturity ranging between 3–6 months. Returns are a bit higher than liquid funds, and the volatility is still low.
3. Arbitrage Funds
These funds earn returns by taking advantage of small price gaps between how a stock is priced today (cash market) and how it’s priced in future contracts. They can deliver 5% to 7%, making them a smart tax-efficient choice for one-year investors in certain tax brackets.
4. Short-Term Debt Funds
These carry slightly more risk but can offer decent returns. They are ideal if you’re okay with mild interest rate fluctuations and are looking for better returns than traditional short-term deposits.
How to Choose the Right Mutual Fund for 1 Year?
Here is how you can choose the right mutual funds for 1 year.
1. Define your goals: Start by asking yourself: Is my goal to simply keep the money safe, or do I want to earn a little more by taking some risk? If you’re someone who doesn’t like much uncertainty, go for debt-based funds—they’re usually more stable. But if you’re okay with short-term ups and downs, hybrid funds could offer better returns.
2. Check past performance: Look for funds that have shown stable returns across different market cycles, especially during market downturns.
3. Choose reliable fund houses: Going with a trusted name like HDFC mutual funds can give peace of mind, especially for first-time or short-term investors.
4. Check the Track Record of a Fund Manager: Do not forget to see which other schemes the fund manager has managed in the past and their performance.
Conclusion
Yes, it’s possible to get decent returns in mutual funds even within a year – but the key lies in picking the right type of fund. Stay away from high-risk equity schemes unless you’re comfortable with volatility. Stick to debt, arbitrage, or short-duration funds if your goal is capital preservation with reasonable returns. And remember, even short-term investing needs clarity. Define your goal, match it with the right fund, and let your money work smarter.
