Whenever we reach close to goals, it’s always recommended to shift the investment from risky avenues to safer options. In this post we talk about which is the best option to park your money if you investment horizon is less than 6 months.
Where to Park Money for Very Short Term?
You can choose to park your investment in any of the following for short term:
[dropcap]1.[/dropcap]Saving Bank Account – You can keep the money in savings bank account. The interest offered is 4% to 7% depending on bank to bank and the account balance.
Taxation – Interest up to Rs 10,000 is exempted from tax. Any additional amount is added to the income and taxed at marginal tax rate.
[dropcap]2.[/dropcap]Bank Fixed deposit – You can do short term fixed deposit. Most banks offer fixed deposits from 7 days on wards. The interest offered is 4% to 6% for 90 days deposit and 5% to 7% for deposit up to 180 days. Please note many many banks do not offer increased rates for senior citizens for deposit of less than 1 year.
Taxation – the interest received is added to the income and taxed at marginal tax rates.
Also Read: Highest Interest on Bank Fixed Deposit compared across 45 major banks
[dropcap]3.[/dropcap]Debt Mutual Funds – You can choose either Liquid Funds or short term FMPs. The returns of both are marginally higher than prevailing 1 year bank Fixed deposits – albeit with higher risk.
Taxation – the gains made on redemption within 3 years of investment is termed as short term capital gains. The gains are added to the income and taxed at marginal tax rates.
[dropcap]4.[/dropcap]Arbitrage Mutual Funds – These funds leverage arbitrage opportunities in stock market to generate returns. As they are primarily invested in equities, they are treated as equity funds. The returns are similar to Debt Mutual Funds.
Taxation – the gains made on redemption within 1 years of investment is termed as short term capital gains. The gains are taxed at 15%+3% education cess (=15.45%).
Also Read: How are your Investments Taxed?
If you compare the taxation part, the saving bank account gets the most favorable tax treatment followed by Arbitrage Mutual Funds. Debt Mutual Funds and Fixed Deposits have the same taxation.
Comparison: Saving Account, FD, Arbitrage & Debt MFs
The table below compares the above 4 instruments on different parameters:
Also Read: 25 Tax Free Incomes & Investments in India
Returns after Tax:
The table below shows the returns at different tax slabs when you invest Rs. 1 lakh and Rs. 5 Lakh for 3 months and 6 months.
The cells with best returns are shaded in green.
Also Read: 7 High Rated Companies Offering more than Bank Fixed Deposits
As you can see for Arbitrage Funds are good for parking higher amounts for people in 20% tax bracket.
Also Read: Why should you Choose Dividend Reinvestment for Arbitrage Fund if Investing for less than a Year?
Significant Points for Short Term Investment:
1. The arbitrage fund gives the best returns for people in higher tax bracket of 20% or more. This is because Arbitrage Funds are taxed at 15.45%
2. The debt funds have the potential to give the best returns for investors in lower tax slab or whose income is below taxable limit but this comes with some risk!
3. Savings bank account offering higher interest rates can be better option than investing in Fixed deposits especially for people in higher tax bracket. However as the amount invested goes up the advantage of saving account in terms of tax treatment is reduced.
Also Read: 21 Hidden Charges in Saving Bank Account
4. In the short term (for 90/180 days) liquid funds and arbitrage funds have the potential to offer superior absolute returns as compared to fixed deposits. On longer duration (for more than 1 year) the returns for debt mutual funds and fixed deposits are comparable.
5. There are also FMPs of 90 and 180 days duration. You can invest in them if you are sure that you do not need money before maturity though I do not see any major advantage over Liquid Funds.
6. As mentioned, go for fixed deposit or saving bank account if you want 100% guaranteed returns. Though rare but there have been instances when Debt Mutual Funds (on July 16, 2013) have given negative returns for few days. Also in case of Arbitrage Mutual Funds, there have been cases of marginal negative returns even in a quarter. For e.g. – JM Arbitrage Advantage Fund gave negative 0.88 returns for July 07, 2008 to Oct 06, 2008 quarter.
Also Read: Investment Risks and How to deal with them
7. If you withdraw before maturity from Fixed Deposits, there would be penalty for that. So be careful to match investment duration with Fixed Deposit tenure.
8. Look out for exit loads in case of mutual funds. Some liquid/ arbitrage funds charge exit load of 0.25% to 0.5% if you exit the fund within 7/90/180 days of investment. So match your investment duration and exit load timing.
9. If you invest direct in Mutual Funds you can expect 0.2% to 0.5% extra returns on an annualized basis. It does not hurt to get extra returns but you may have to do a little extra work for that.
10. The advantage of investing in arbitrage fund is in case you did not need money in the short term and keep it invested for more than 1 year, the entire return would be tax free.
Also Read: Where should you Invest your Emergency Fund?
The decision to park very short term money can be done based on your liquidity needs, amount to be parked, potential of returns, taxes and risk tolerance.
If you are not very finance savvy and are in the higher tax bracket (of 20% or more), the best option would be to get a saving account with banks offering higher interest. If you are financially more aware invest in arbitrage funds or liquid funds or FMPs, you would not be disappointed by the gains. The first time investment might be a bit taxing due to KYC formalities but subsequent transactions can be done easily through internet. Also the redemption request can be placed from internet.
Go ahead and do your calculations on finding the best short term investment for you.
21 thoughts on “Where to Park Money for Very Short Term [less than 6 Months]?”
Nicely explained sir. In India people only use fixed deposits or saving account, they are a bit shy investing in mutual funds.
What’s with the 10.30% tax slab? Does such a slab exist?
This slab has now been changed to 5.15% from this financial year. The post is old, will update it. Thanks for pointing this out
In case of arbitrage funds, one can choose dividend reinvestment option and avoid STCG.
I just came across this mutual fund portfolio to park money for very short term. Looks pretty decent.
Thanks Amit. It was very confusing that where to save our money for short Period. Thanks for sharing this useful information to us.
Amit, aren’t FDs between 7 days to 6 months calculated per annum?
So for investment of 5 lacs for a year at 6.5 percent, I will be returned 5,34 lacs. But if I invest 5 lacs for 3-6 months slab, then I will get only 17k as interest, right?
I am sorry Ii did not get the question fully. But if you are asking if the interest is compounded quarterly for 7 days to 6 months, then yes some banks do it quarterly while others do it on annual basis. However it would not make much difference in final interest.
Sorry for the confusion. I am just trying to understand how the interest is calculated in less than 6 month FDs and if they are worth it. To give another example, if I deposit 5 lacs for 1 month FD on a 5.0% interest, then will I end up with 25000 as interest or 25000/12 months = INR 2083 as interest?
For 1 month you will get 2083 as interest.
Generally Banks give a quarterly compound interest for having a deposit with them for more than 1 quarter which basically mean for more than 2 quarters (compounding will happen only when it crosses the second quarter). Though some Banks may not give compounding effect. But generally all Banks compound at least on yearly basis.
All Banks’ website or Branches give this information.
Great article Amit. One thought, is short term investment better or long term?
Short term is for goals which are close while long term are for goals far away in future. So investment should be according to your goals – Short term investment for short term goals and vice versa!
Interesting article, thanks for sharing the information. Can you suggest if it is advisable to park the money from FD’s to Liquid funds for a horizon of one year. As I keep the FD’s for any contingencies but now since the rates of FD’s have gone down so don’t want to stay invested and looking for some good options. Money will be invested on my wife’s name who’s income is not taxable as on date.
Thanks for appreciation! Bank FDs and Liquid funds follow similar pattern. As the returns of Bank FDs are coming down so would for Liquid Funds. You can move some money in Liquid or Arbitrage Funds.
Even if you invest in your wife’s name the income is going to be clubbed with yours! Had done a Post on Emergency Fund which might be of help – Where should you Invest your Emergency Fund?
Good comparison. Mostly because of laziness people let money stay in bank account itself .
Thats true 🙂
Hi Amit, I have 20 lakhs available for investment for a short term – exactly 6 months. I also have my KYC registered on CAMS and KARVY and have SIP’s in MF’s such as Birla, Tata, HDFC and SBI. Can you please guide me where to park this sum so that I can get good interest rate and the money available for withdrawal by Nov 2016.?
Also i have tried with my banks for an FD but as I understand its not allowing me to open FD for a period of 180 days although they post on the website the interest rate is 6.5 % but not allowing to open online.
Many thanks to assist.
There are multiple banks which are offering 7.5% to 8% for 6 months fixed deposit. I do not see a problem in banks accepting this. You can check the highest FD rates here.
Other than FD, you can invest in Liquid/Short Term debt or Arbitrage funds. In case you are in highest tax bracket dividend reinvestment option would be more beneficial. As for risk of negative return is concerned – Bank FDs are safest (guaranteed returns) followed by liquid funds and then arbitrage funds.
Thanks! Good to know it helped