Your money works for you when you invest prudently to create wealth. Fortunately, there are a variety of investment avenues that you can choose from according to your financial goals, risk tolerance, and liquidity requirements.
Investing long term has always attracted attention, but it is also important to focus on short-term investments, which you can convert into cash within 1 to 5 years.
The following financial instruments can be used to invest short-term funds.
1. Liquid Funds
It is prudent to have an emergency fund of a sizeable amount and Covid-19 made this even more important. There should be enough money in the corpus to cover a year’s expenses.
In order to build a contingency corpus, you can invest your money in liquid funds. An investment in these funds can offer slightly higher returns than a savings account because they invest in money market securities maturing in 91 days. These investments are secure, so you can enter and exit at any time. Post-tax returns on liquid funds range between 4% and 7%.
Liquid funds can be used to park money as little as one day to as long as 90 days. Liquid funds rarely see a dip in their net asset values (NAVs). As soon as you redeem it, the money is deposited into your account within two to three business days.
2. Ultra Short Duration Funds
An ultra-short duration fund is a debt fund that lends to companies for a period of 3 to 6 months. Since these funds have a low loan duration, they are slightly higher risk than liquid funds, but they are still among the lowest-risk schemes to invest in.
They are ideal for anyone who wants to put money aside for a few weeks to a few months. Investors who invest for at least three months will have close to zero risk of losing money. As compared to bank fixed deposits of equal or comparable duration, these schemes tend to provide similar or slightly higher returns.
3. Arbitrage Funds
An arbitrage fund creates debt equivalents by using equity and futures. By buying equities and selling futures, the fund manager locks in the price difference between the two. In effect, this price difference is like a fixed return instrument with an annualized return of approximately 8%-9%. A major advantage of arbitrage funds is that they are taxed as equity funds, although this advantage may be somewhat diluted following the 10% tax on equity funds’ long-term capital gains.
4. Money market funds
In terms of risk, these are the lowest-risk products available in the mutual fund industry. Typically, money market funds invest in short-term government instruments such as call money market, commercial paper, Treasury bills and bank CDs with maturities between three months and a year. The risk of default and interest rate volatility is minimal. In comparison with bank deposits, they are a little more tax-efficient..
5. Post Office Term Deposits
POTDs can be opened at any post office near your home for one year. The Government of India fully guarantees these FDs like a bank FD. They have a one-year lock-in, but they can always be pledged in an emergency and raised up to 75% of their value. In terms of taxation, POTDs are treated as bank FDs.
6. New Age Savings Bank Account
New-age banks offer one of the most competitive interest rates on savings accounts. The new-age digital experience not only offers convenience on the go, but also offers higher ROI on savings accounts.
In addition to meeting your short-term financial needs, the short-term investment options listed above can reduce your tax liability. Good luck with your investments!
(By Abhinav Angirish, Founder, Investonline.in)