Holidays are the time to chill and relax. A perfect holiday entails visiting a destination of your choice and doing the things that make you happy. When you make a holiday plan, you do some research on the destination, the weather, the accommodation and so much more stuff. However, many of us miss out on one integral part of holiday plan. How to finance the holiday? In order to ensure that your holiday is perfect, you need to have enough money in place to finance the holiday. There is a possibility that some of you might have considered taking a loan to finance your vacation. However, this is not necessarily a good idea for several reasons:

• Such loans usually carry a fairly high rate of interest. The interest payments can significantly erode your savings.

• It can put a put stress on your finances and might have a negative impact on your overall financial plan.

• If you default on even one EMI payment, it can negatively impact your credit score.

Go the mutual fund route

Mutual funds can be a great investment vehicle for financing your vacation goals. Depending on the time horizon i.e. in how much time you would like to take the vacation and the total cost of the vacation, you can choose from several mutual fund options.

Planning a vacation in the next 3 to 6 months – if your vacation is less than six months away then you should opt for liquid funds or ultra short-term funds. Liquid funds invest in debt securities with a maturity of not more than 91 days while, ultra short-term funds invest in debt securities with a maturity of upto six months. Both these options carry relatively lower levels of risk and generate potentially competitive returns.

Planning a vacation in the next 12 to 18 months – if you are planning a vacation in the next 12 to 18 months then you can consider investing in a short-term fund. These funds invest in debt securities with maturities between one to three years. When investing in debt funds, always remember higher the duration, higher is the risk profile of the scheme.

Planning a vacation in the next 24 to 36 months – if your vacation is at least 2 to 3 years away, then in addition to investing in short-term funds, you can consider investing in an equity fund through a Systematic Investment Plan (SIP). If you feel that your overall risk profile does not allow you to take an exposure to a pure equity fund, then you can consider investing in a balanced fund. These funds invest in a mix of equity and debt. The equity portion of the portfolio can potentially generate relatively higher returns while the debt portion of the portfolio can provide downside protection in volatile markets. You can choose to invest a lumpsum amount or you can go through the SIP route.

Planning a holiday with mutual funds is simple and easy. Do consult your financial advisor before making any investment decisions.