Investors are always on the hunt for options to park their money for a while until they need it. Savings bank accounts with high liquidity remains the overwhelmingly popular choice for most people. But standing in 2017, there are plenty of other short-term options that offer a nice mix of return and liquidity.
What is a short-term investment?
Typically, any investment which is for less than five years is considered short term. Such investments are usually made to meet unavoidable events that are likely to occur in the near future. For instance, your son may be just appearing for his board exams and after a couple of years will require a good sum of money to pursue higher education. Also, buying your son a motorbike after he graduates or a new car for your family three years down the line, are all short term investment goals. While some of them can be postponed, others are not. When your purpose is to achieve some definite goals in near future, you should avoid taking risks and be very particular about your financial decisions.
Investors requiring short-term money want safe returns from their capital. And here are some of the best ways to generate money in 2017.
It's one of the safest and easiest ways to access money. A savings account can be opened in any nationalised or private sector bank. The key motive here is liquidity. You can withdraw money as and when you need it. The only flipside is that the rate of interest offered is pretty low, often hovering around 4% per annum.
These are a type of mutual funds where the money is invested in short-term government securities and certificates. An investor can enter and exit such funds at any given time because these investments are secure. But try to restrict the parking of your emergency funds in these instruments because redemption usually takes around two-three days. You can conservatively expect to earn 4% to 7% after-tax return on a liquid fund investment.
You may consider a liquid fund to park your money even for a day or for any duration. The money in liquid funds is invested in money market instruments. The net asset value (NAV) of liquid funds rarely dips. You may choose the growth option or the dividend option. The dividend is taxed at almost 30%. The capital gains are added to the income and taxed at a marginal rate. From the point of view of taxation, investors falling in the lower tax bracket will be better off if they choose the growth option, while those in the higher bracket can choose any of the two options.
These are funds that invest money in securities maturing in one-three years. There is a fair bit of risk involved in these funds because they are for the ultra-short term. The tax burden is the same like all other debt funds. Banks offer deposits of various time frames with seven days being the minimum. So if you want to park your money even for just a week, you can choose a fund with a matching tenure.
Interest offered on the deposit is added to the income and then taxed at marginal rate.
While liquid funds are suitable for investment tenure of up to a few days, a short term mutual fund is ideal for tenure of a few months. Short term debt funds, like liquid funds, are conservatively managed with the key aim to safeguard capital and post modest appreciations.
From the taxation point of view, both liquid funds and short term mutual funds are equal to each other.
Recurring deposits (RDs):
It's a type of secured investment and suitable for those who are not interested to invest a lumpsum amount but can put in money on monthly basis. You can visit your nearest bank for the purpose or also open an RD account at your post office. Bank RDs have a minimum tenure of six months and a maximum of 10 years. Interest earned on RDs is taxable.
National Savings Certificate (NSC):
These are one of the safest investment instruments with a tenure of five years. NSCs can be bought from your nearest post office and you can claim tax exemptions under section 80C of the Income Tax Act. The interest earned, however, is taxable.
These are also known as equity mutual funds. Arbitrage funds carry better tax efficiency and can be held for more than one year. The returns are approximately 8% after tax calculations.
Fixed maturity plans (FMPs):
These have a minimum three-year lock-in period and are similar to bank fixed deposits (FDs). FMPs, however, are more tax efficient and offer better return than FDs.
You may consider these investment options If you need money in the short term for the remainder of 2017.
Naval Goel is Founder & CEO PolicyX.com