Which are the 7 Best short term investment options in India? Many times, we get a big amount of money whether it is from bonus or property sale. Equity is quite volatile, so we prefer to invest those funds in short-term liquid instruments where we can expect a safer return.
We can segregate our goals based on short-term or long-term. For the short-term goals, we would always prefer to safe investment options where we could get decent returns but with higher liquidity or assured capital protection. Like home down payment, car purchase, marriage, an amount for vacation etc. Goals like retirement, child education and any goal which supposed to come after 5 years can be considered as long-term goals, where equity allocation plays an important role to accumulate the corpus.
But for short-term goals equity is not quite favorable to invest. let’s say if you want to park some money for 6 months to 1 years, so as per nature of equity instruments being volatile, can erode your capital within this time frame, at this time educated investor will always prefer to the fixed return type of instruments where your capital is protected and can be liquidated anytime as per your requirement.
So, which are those 7 best short term investment options in India, where we can park money for short tenure
First of all, it is important to understand that if we say about investing our amounts for 1-3 years, then that too is a short-term period. For 1-3 years, we should not invest our capital into equity in any way & should not take any risk if our primary objective is capital protection
SAVING ACCOUNT (SWEEP IN FACILITY)
In the recent past, most banks reduced the interest rate on savings accounts from 4 percent to 3.5 percent. In such an environment where interest rates are expected to go down further, a sweep-in fixed deposit (FD) in a bank could come handy.
A sweep-in fixed deposit known by different names like money multiplier, 2-in-1 account, comes with a higher yield (around 6.75 percent currently) compared to a savings account, at the same time maintains the liquidity of a savings account.
If one chooses to go with such a sweep-in deposit, any amount above a certain threshold limit in the saving account is automatically converted into an FD. Say, if you have Rs 1.5 lakh in your savings account and the threshold limit is Rs 25,000, then Rs 1.25 lakh will automatically be moved out and converted into an FD. And, in case you have insufficient funds in your savings account, the deficit will be utilized by withdrawals from your FD and funds will be moved back into the savings account.
CORPORATE FIXED DEPOSIT OR NCD
Apart from a fixed deposit, if we want to get a little more interest then we can see the company’s fixed deposits and NCD options.
Corporate Fixed Deposits are one of the many money-raising tools for Companies. Through these, Companies raise money from the public and offer a fixed rate of interest for different tenures. The amount of money which can be raised is decided by the Approving authorities.
As a part of your portfolio, Corporate Fixed Deposits provide much-needed stability in returns and also reduce volatility. They best suit investors who prefer fixed returns on their investments
- These have periodic interest payment option (Monthly, Quarterly, Semi-Annually, Annually) and Cumulative option (Compounded and paid at maturity) specific to the deposit.
- They offer higher rates of interest than regular bank deposits.
- Issue is rated by Independent Rating agencies like CARE, CRISIL, ICRA etc.
- Some Fixed Deposits can be bought online
- No TDS if interest is up to Rs. 5000 in a single financial year.
Liquid funds invest in money market instruments whose residual maturities are usually less than 90 days. These funds, as the name suggests, are highly liquid; redemptions in liquid funds are processed within 24 hours on business days. Many liquid fund schemes also offer instant redemptions (the money will be credited to the investor’s bank account in a few minutes) for transactions made through the asset management company’s (AMC) website or mobile application. Liquid funds have no exit load and so you can redeem your investment partially or fully at any time without any penalty, and therefore is a very good short-term investment option in mutual funds.
A very high degree of capital safety can be expected from liquid funds. Liquid funds very rarely gave negative returns even for a week or a day. The historical returns of liquid funds have been much higher than savings bank account interest; liquid fund’s average returns in the last 12 months was around 6%, while interest rate of most savings bank accounts is 4%. These are excellent investment options to park funds which lie in your savings bank account. Investments in liquid funds can be made for a few days to few weeks to few months
ULTRA SHORT-TERM DEBT FUNDS (BEST SHORT TERM INVESTMENT OPTIONS)
If you intend to remain invested for more than 3 months, then ultra-short-term debt funds are better investment options than liquid funds. Ultra short-term debt funds are also money market mutual funds, which invest in money market instruments whose residual maturities range from 90 days to a year. As such, these funds are suitable investment options for investors looking to invest for 3 to 12 months. Ultra-short-term debt funds, like liquid funds, offer high degree of safety, high liquidity, but these funds usually give superior returns than liquid funds. Ultra-short debt funds gave 7% average returns in the last one year
- Park money that you need in the next 3 months to a year
- It as a substitute for very short-term bank deposits of 90 or 120 days
- It can use it along with liquid funds to build an emergency fund
- Use it to park money that you will need for paying your insurance premium or school fee if such need is at least a good 6 months away
Many investors have started to be investing in Arbitrage funds especially after Budget 2014. As debt funds are no more lucrative as they don’t offer tax benefits like they used to do earlier. Many smart investors have started to invest in such funds as they offer tax advantage with attractive returns.
The term arbitrage means buying in one market and selling in another market simultaneously to get the price the difference. Let’s understand with example if we purchase apple from Himachal Pradesh at 100 Rs per Kg and sell it simultaneously at 103 Rs per K.g in Delhi, so the price difference of Rs 3 will be our profit
Arbitrage funds apply the same concept, they purchase with cash market and sell it with future market or vice versa, when arbitrage opportunity occurs.
Arbitrage funds are treated as equity funds for taxation. This means investments in them sold before a year qualify for a short-term capital gains tax of 15 percent. Liquid funds, on the other, are treated as non-equity funds for taxation. If they are sold before three years, the gains are treated as short-term capital gains, added to the income and taxed according to the income tax slab applicable to the investor.
Arbitrage funds give you around 40 percent additional returns because of the favorable taxation laws. Liquid funds and ultra short-term funds are also yielding around 6-7 percent, but the post-tax returns work out to 5 percent only,
So, it can be considered best short term investment options in India currently if you are accounting post-tax return for 30% tax slab individuals.
Source: Value Research
POSTAL OFFICE TERM DEPOSIT
The Post Office Term Deposit (POTD) is similar to a bank fixed deposit, where you can deposit money for a fixed period and earn a guaranteed return through the tenure of the deposit. At the end of the deposit’s tenure, the deposited amount and interest earned on it are returned to the depositor.
The capital in the POTD is completely protected as the scheme is backed by the Government of India, making it totally risk-free with guaranteed returns.
- The interest rate offered ranges from 6.8% to 7.6%. These time deposits can be held for a tenure ranging anywhere between 1 to 5 years.
- As the POTD is offered by the Government of India, it does not require any commercial rating.
- The investments made under 5 years are eligible for tax benefits and deductions under Section 80C of the Income Tax Act of India, 1961.
FIXED MATURITY PLANS (FMP) OR HYBRID FUNDS
Fixed maturity plan is a fixed tenure, debt-based scheme, which terminates on predetermined dates. FMP best suits those investors who wish to park their money for a particular period of time. The returns of these schemes are predictable as money is invested in fixed rate type of instruments Maturing in the line of the maturity of FMP.
FMPs are closed-ended schemes with a pre-defined maturity, which invest in various debt instruments based on the investment objective and asset allocation of the Scheme such as debt instruments, certificates of deposit (CDs) and commercial papers (CPs)
FMPs’ one of the most attractive point is that they invest in a portfolio of debt securities whose maturity or tenure matches that of the scheme.
Though FMPs for less than three years have lost sheen since the tax changes announced in the July 2014 Union Budget, those with a horizon of over three years are still attractive. Prior to the tax changes, FMPs scored over FDs due to lower tax rates and indexation benefits. Indexation helps in saving tax on capital gains as it allows investors to adjust for the effect of inflation on the gains made. However, the July 2014 Union Budget increased the long-term capital gains tax on debt-oriented mutual funds from 10% to 20% with indexation, and the definition of ‘long-term‘ for debt mutual funds was revised to 36 months from 12 months. This revision affected FMPs with less-than-three-years tenure. Assuming individual falls in the highest tax bracket of 30%, short-term capital gains tax for FMPs less than three years is now 30% % (plus applicable surcharge and cess), while long-term capital gains tax for FMPs greater than three years is 20 % (plus surcharge and cess). FDs, on the other hand, are taxed as per the tax bracket
Assuming the investor falls into the highest tax bracket
FMPs with a three-year horizon are still attractive based on indexation benefits wherein tax will be significantly lower than what is payable on FD interest (Table 2).
Assuming annualized returns of 8%, inflation of 7% and tax brackets excluding cess
As the tables indicate, outflow across the tax brackets is lower than the flow from investments in FDs. The biggest benefit is for investors in the highest tax bracket. In addition, the higher interest rate scenario works well for FMPs as they can lock into the high yields for the investment period and enable investors to reap high returns.
We had discussed above for 7 best short term investment options in India. Before considering any option to invest your surplus money for short-term period, you need to assure what is short-term in nature, any period, if you are looking to stay invested up to 3 years, can be considered for a short term.
For short tenure, equity cannot be a good choice if your primary objective for capital protection or your amount which you kept aside for any particular goal, for which we cannot afford to lose the principal part of the money. However, we can invest the same money in a Balanced fund if you can take some risk because equity can boost your returns but specifically if you are parking it for Min 3 years to 5 years.
Even you always consider the tax implications as well before going any above-mentioned options. After the budget 2014, things have changed for debt mutual funds, earlier debt fund used to offer lucrative post-tax returns with indexation benefits but now tax implications have changed in favour of Debt fund, now tenure for long-term capital gain has revised from 12 months to 36 months, or indexation benefit with 10% to 20%.