Goals define investments. Your investment requirements, in terms of money and time, will change with your goal, such as going on a vacation or making down payment for a car. Accordingly, you will have to choose your investment avenue that conserves and grows your money at the same time.
If your time frame is anywhere less than 3–4 years, then you would want an investment instrument that is easy to liquidate, yields moderate returns and is safe! In such a case, you will not invest in an equity mutual fund or a Unit-linked Insurance Plan (ULIP) scheme, given their inherent risk in the short-term. So, what investments avenues do you have to save for such short-term goals? Let’s find out!
1. Savings Accounts: You can park your money in a savings account if your investment goal is less than 1 month from now. Savings accounts are absolutely liquid and you can withdraw instantly by using your debit card. Most of the banks offer interest rates of 4% p.a. while some banks, such as Yes Bank and Kotak Mahindra Bank, offer interest rates of 6% p.a. However, as the returns from savings accounts are low when compared to other options available, your savings account should only contain your emergency fund and day-to-day expenses apart from your immediate goals.
2. Bank Fixed Deposits: You can consider parking your funds in bank fixed deposits (FDs) if your investment goal is less than 3 years away. Bank FDs are also quite liquid and you can redeem your money any time by visiting your branch or through online banking. However, the bank may charge a penalty if you close your FD before the maturity date.
3. Liquid funds: Liquid funds are debt mutual funds which invest in money market instruments such as treasury bills, commercial papers and certificate of deposits. These funds invest in securities with a residual maturity of up to 91 days. Liquid funds offer higher returns than savings accounts and have no lock-in period. You can enter and exit these funds at any time and they do not charge any entry or exit loads. These funds are reasonably safe as they invest in securities with high credit rating.
4. Ultra short-term funds: Ultra short-term funds are another option you can consider. These funds invest in securities with maturity period of over 91 days. Longer maturity period of the underlying securities make ultra-short term funds riskier than liquid funds. However, returns from ultra short-term funds may be higher than that of liquid funds. Some ultra short-term funds may even charge exit loads.
5. Arbitrage funds: These funds are primarily equity funds and can be a good option especially in the current volatile market scenario. These funds work for you by taking advantage of price differentials of stocks in equity and derivative markets. Because of their equity orientation, the dividends and capital gains made from more than one year of investments are tax free. You should consider these funds when your investment goal is at least one year away.
Your choice of short-term investment vehicle should depend on your investment horizon, liquidity and risk tolerance. If your risk appetite is very low or if you are not market savvy, park your funds in a savings account (in case of very short-term horizon, such as less than 1 month) or you can opt for a bank FD.
| Savings Accounts | Bank Fixed Deposits | Liquid Funds | Ultra short-term funds | Arbitrage funds |
Ideal investment horizon | Less than 1 month | 1–2 years | Less than 3 months | More than 3 months | 1–5 years |
Risk factor | Low | Low | Low | Moderate | Low |
Liquidity | Liquid | Liquid but has penalties for premature withdrawal | Liquid | Liquid | Liquid |
Returns | 4-6% | 7–8% | 8–9% | 9–10% | 7–8% |
-by Naveen Kukreja – Managing Director, Paisabazaar.com
