A bank savings account continues to be a popular short-term parking space with most individuals. However, with many banks offering lower returns on savings account balances, investors scurry for alternative investments that have the potential to generate a higher return.
The need to park surplus funds for a shorter duration arises when either the financial goal is near or when suitable long-term investment opportunities are lacking. Short-term investments help to keep the funds not only liquid but also in generating higher effective post-tax returns.
Alternatives to savings account
As an alternative to a savings account, there are fixed-return options as well as market-linked short-term investment opportunities, which typically range from a few days to around 12-18 months. Beyond that, look for medium-term investment options if your need is to park funds for a period of around three years.
Short-term investments have the potential to generate better returns than longer-term instruments. When interest rates rise, the existing value of bonds falls in anticipation of higher-yielding bonds. Therefore, debt funds that have underlying securities with lower maturities yield high returns in a rising interest rate scenario.
Let us see some of the short-term investment options having the potential to generate returns higher than a savings bank account.
Of the 16 categories of debt funds, about five are suitable for parking short-term funds as they hold securities that have a shorter maturity profile. If you are looking to choose a period from a few days to anywhere up to a year, choose from overnight funds, liquid funds, ultra-short duration funds, low duration funds, and money market funds. Each of these categories will have a specific maturity profile of underlying securities which could be either three months, six months, nine months, or 12 months.
Bank fixed deposits
If you are looking for assured returns with high safety, look no further than bank fixed deposits. Although bank term deposits are available for up to ten years, you can park funds in them for a tenure as low as seven days to even up to 365 days. Bank fixed deposits are insured up to Rs 5 lakh per bank per depositor under Deposit Insurance and Credit Guarantee Corporation cover.
Company deposits offer short-term tenure of as low as six months to one year, although tenures up to five years are available. Before investing in them, check their ratings as not all of them could be AAA-rated, signifying high safety of principal and interest payment. As the default risk is high in them, stick to established firms.
Post office time deposit
If you are looking at a duration of one year to park funds that can provide a sovereign guarantee on the entire amount of deposit, the post office one-year term deposit is the right option. There is no maximum limit on investment in them and the interest payout is on an annual basis.
Arbitrage funds are hybrid schemes that hold a minimum of 65% in equities. They aim to generate arbitrage profits by exploiting price differences of the same underlying assets in different capital market segments. Being a mutual fund scheme, the returns are not fixed and assured but depending on the market conditions, the returns are competitive compared to a savings account.
KEEP IT LIQUID
— Short-term investments help to keep the funds not only liquid but also generate higher effective post-tax returns
— Within short-term debt funds, you can choose from overnight funds, liquid funds, ultra short duration funds, low duration funds, and money market funds
— Select AAA-rated company fixed deposits of established firms for parking your short-term funds