How to plan for vacations with mutual funds

Schools will close for summer vacations. Children are eagerly looking forward to summer vacations for taking a break from their busy school lives, go to a tourist destination to indulge in fun and frolic. Parents also look forward to summer vacations to get a break from the hustle and bustle of their daily lives, spend time with their families in some nice locales. It is peak summer in India now; so we will see many families heading to the hills in the coming days and weeks. Enjoying a nice vacation requires weeks and months of planning. You need to plan your itinerary, book tickets, hotels, cars etc. If you are planning some adventurous activities like river rafting, paragliding, camping, trekking etc, then you need to make arrangements. Above all, you need to have a budget for your vacation and do your financial planning accordingly.

Find out how much you need to save

Firstly, you need to decide how many vacations you want to take in a year. Usually, most families take two vacations, one in summer and one in winter. Many families also take vacations during the festive season and occasions like birthdays, anniversaries etc. Next step is to work out the costs for each vacation. It will depend on where you plan to visit. You should budget for air or train fares, hotels / resorts, local transportation, meals, shopping etc. If you are planning a foreign vacation you should also consider exchange rates and how it may change in your vacation planning. With rising cost of airfare, hotels, fuel etc., vacations can involve considerable amount of expenses. So you need to plan well in advance to ensure that your budget and savings are not disturbed or misaligned.

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When you should you start planning for vacations?

Unless you are an “impulse traveller”, who plans at the last minute, you should start planning for your vacations several months or years in advance so that you can save sufficient funds for your vacation without having to dip into investments earmarked for important life-stage goals like emergency fund, purchasing your house, children’s education, retirement planning etc. The length of your planning will depend on the destination and planned duration of stay. For example, if you are planning a trip within the country that requires air travel and stay of 7 to 10 days, then you should start planning for it 12 – 15 months before your vacation. If you are planning a 2 – 3 week foreign vacation that will require intercontinental travel, then it may require 2 – 3 years of planning.

How to save for vacations?

Once you have decided where you will travel and have estimated your travel budget, you should start saving for your vacation budget. You should try to get higher returns on your savings by investing it in appropriate schemes keeping your vacation goal in mind. Some families may prefer to invest their savings in recurring deposits or fixed deposits, but mutual funds may offer potential superior yields on your savings compared to traditional fixed income investments. Investing in mutual fund Systematic Investment Plans (SIPs) from your regular savings can be a good option for vacation planning.

Where to invest for vacation planning?

Vacation planning is usually short to medium term financial goal within 12 months to 3 years. For short to medium term financial goals, debt mutual fund schemes are good investment options because they are less volatile than equity or equity oriented mutual fund schemes. An important point to keep in mind in fixed income investment planning is to select schemes whose duration profiles match with your investment tenure. For example, if your investment tenure is 2 years then the duration profile of your scheme should be around 2 years or less. If the duration profile is longer than your investment tenure then the Net Asset Value (NAV) of your investment may be impacted by interest rate changes. If the duration profile of your investment is much shorter than your investment tenure then you may get lower returns than expected, especially if interest rates are falling.

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Vacation plans within 12 – 18 months

If you are planning a vacation within 12 – 18 months, you may consider investing in ultra-short duration, money market or low duration debt funds. These schemes are relatively less volatile compared to longer duration funds and are more suitable for shorter tenures. You should always be mindful of credit quality when investing in these funds. It is always advisable to invest in schemes of high credit quality, even if they give lower yields than schemes of lower credit quality.

Vacation plans in 2 – 3 years

If you are planning for a vacation, which is 2 – 3 years away, e.g. a foreign vacation, you may consider investing in short duration and corporate bond funds with similar 2 – 3 years duration profile. You can also invest in Banking and PSU debt funds, if the duration profile of those schemes matches or is slightly short of your investment tenure. Target Maturity Funds can also be good investment options, if the maturity date matches with your vacation plans. These schemes can give higher yields than shorter duration debt schemes. However, you should be prepared for some volatility if interest rate changes.

Suggested reading – Should you invest in Target Maturity Index Funds when interest rates are high?

Points to keep in mind for vacation planning

• Book your tickets and hotel at the right time. If you delay for too long, your expenses may be way higher.


• Start saving and investing for your vacation over a sufficiently long period of time, so that you are able to save more and get higher returns through compounding.


• You should enjoy your vacation but do not over-indulge. Over-indulgence can harm your financial interests.


• Vacations are great for our bodies and minds. However, you should never compromise on your other important life-stage goals for a luxurious vacation. With careful planning and disciplined savings you can have a wonderful vacation with your family and at the same time, stay on course of your other life-stage financial goals.

Issued as an investor education initiative by HSBC Mutual Fund.