Can investing in Mutual Funds help me go on an Exotic Vacation

Dreams and aspirations often meet deadend for want of money. As a result, you tend to postpone the expense till you have enough savings in your account. By the time you have saved enough, you realize that the money you have saved is not adequate. So, you end up in a catch-22 situation where you are always running after that elusive dream which seems so near but is yet so far.

For example, going on an exotic vacation. It is now possible for you to address this problem and go on your vacation with careful financial planning. Various investment avenues can help you achieve this goal of yours but one of the best ways to realize this goal is to invest in mutual funds.

Why choose mutual funds to go an exotic vacation?

There might be a question in your mind that mutual funds might take a lot of time to offer the returns that are required to finance your holiday and you can take a personal loan to finance the expense. This raises the classic question of SIP vs. EMI. Taking a loan to fund a holiday is not a wise approach under any circumstances for several reasons:  

• You will have to pay high interest rates that can go up to 20%. This will significantly erode your savings.
• It will put a stress on your finances, and you will have to compromise on your other requirements.
• If you default in making even one EMI, it will negatively impact your credit score.
• You might end up in a debt trap jeopardizing your future financials.

Now in comparison, choosing mutual fund investment for financing your exotic vacation is an ideal approach. You can take the SIP (Systematic Investment Plan) route to invest in suitable short-term mutual funds to generate an adequate amount of money to finance your holiday, without being debt-ridden.

Where to invest your money for your vacation?

There are specific steps that you should follow before deciding on the particular mutual fund you should choose.

• You need to identify the country/region that you and your family members want to visit.
• Ascertain the total amount that the trip is going to cost you. Keep in mind the factor of inflation while determining this cost. The longer you wait for the trip, the more expensive it will be.
• Set a realistic date for your trip.
• You need to ascertain the amount you can spare every month for investment.

After you have determined the above factors, you now need to look for the mutual funds that will help you generate adequate returns to finance your holiday. For instance, if you and your spouse want to go on a 10-day holiday to Europe, the expense would be around Rs. 3,00,000/- plus shopping expenses. Let us assume that you want to go on the holiday after two years. Considering the inflation to be 5%, you will require appx. Rs. 3.35 Lakhs in 24 months.

Considering that your mutual fund investment generates a return of 9% p.a., you will need to invest around Rs. 12,791/- per month for the next two years to get Rs. 3.35 Lakhs. In a nutshell, you will be investing Rs. 3.06 Lakhs over two years to finance your holiday expenses of Rs. 3.35 Lakhs.

Types of Mutual Funds based on your goals

Usually, mutual funds offer high returns when you have a long investment horizon (more than five years), but you might not want to wait for such a long period. In such a situation, there are two options for you when you take the SIP route: –

• Ultra Short-duration funds
  These mutual funds are ideal if you have a time horizon of less than one year. The generate returns of around 7% per annum.
• Short-duration Funds
  These mutual funds are ideal for investments up to three years and generate annualized returns of around 8% over the period.
• Balanced Advantaged Funds
  These mutual funds offer annualized returns of up to 9% for a time horizon of three years and have relatively lower risk involved.

Use Systematic Transfer Plan

As the time for your holiday arrives near, you must activate the Systematic Transfer Plan; wherein a fixed amount will be transferred at a given interval from your equity funds to ultra-short-term debt funds, reducing the risk involved.

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