How you can create a separate Vacation Fund for frequent getaways

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There has been a marked change in the way Indians are holidaying in recent years. Instead of one big break, you will observe that many couples frequently undertake multiple short trips. This is unlike the earlier generation which waited till retirement to plan an international trip or travelled just once in a year. Be it an adventure trip or just relaxing in a resort, a weekend trip is a perfect way for the current generation to unwind. These short trips are undertaken 2-3 times in a year. Planned within a month, the cost of these short trips start from Rs.10,000-15,000, each. If one stays in a more than decent resort, the cost can go up to Rs.30,000-35,000 for a usual family of four. If planned further from the home city and in another state for 4-5 days, the cost can go up to Rs.60,000-70,000 or even more.

Travel has become a regular recurring expense for the present generation and usually is paid for from the regular salary account or credit card. Now think of this. What if you have a vacation kitty from which you can withdraw as and when your travel plan is underway?

 

Why create a vacation fund?
The idea is to stash away regular amounts every month in a disciplined manner into a vacation kitty. So, when your travel plan is on the cards, you can withdraw from this fund. It is prudent to withdraw from a dedicated fund mapped to a goal rather than randomly withdrawing money from salary account as and when required. When a particular goal is mapped to a fund, it gives clarity and a perspective as to how to prioritise resources. It will make you aware if you are going overboard and whether you need to postpone your trip or tone down the budget. You can start with small amounts and the fund will eventually grow bigger with your regular contributions. More importantly, when the money is arranged for, you need not rely on unnecessary borrowing like credit card debt for short vacations.Where to invest?
Instead of keeping idle in savings account, you can invest small contributions for a vacation kitty in a liquid fund. A liquid fund is a type of debt mutual fund. It invests in short term instruments like commercial paper, certificate of deposit, treasury bills, term deposits, etc. The fund manager invests in these short -term paper having a maturity period of up to 91 days, i.e., 3 months. For such a short duration, the daily NAV movement of liquid funds is very less and hence the volatility, i.e., the risk is very low. While the returns are not fixed, liquid funds usually yield better returns than a bank savings account. Many professional well managed liquid funds also beat interest rates on bank fixed deposits. The money redeemed from a liquid fund is usually credited into an investor’s account the next day. As per SEBI’s new mandate, many mutual funds are now providing instant redemption facility of up to Rs.50,000.

Why not fixed deposits?Unlike liquid funds, there is no flexibility to redeem your money anytime in the case of bank deposits. You need to break your deposit. Most banks levy a penalty up to 1 per cent on premature withdrawal of deposits. Moreover, you need to pay tax on interest from the bank deposit even before you receive the interest income in your account as opposed to liquid funds where you need to pay tax only after redemption and receipt of gains.Liquid funds are a better bet than fixed deposits when it comes to easy liquidity and convenience. These funds are apt to park surplus funds for short periods. Regularly investing in a liquid fund is an effective way to financially plan for your short trips.

Just to give you an idea, here is the past 1 year performance of all liquid funds as on date.

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