{"id":2050,"date":"2012-04-08T13:32:40","date_gmt":"2012-04-08T13:32:40","guid":{"rendered":"http:\/\/www.apnaplan.com\/?p=2050"},"modified":"2014-06-19T00:11:16","modified_gmt":"2014-06-18T18:41:16","slug":"parking-short-term-money-bank-fixed-deposit-or-liquid-fund-or-savings-bank-account","status":"publish","type":"post","link":"https:\/\/www.apnaplan.com\/parking-short-term-money-bank-fixed-deposit-or-liquid-fund-or-savings-bank-account\/","title":{"rendered":"Parking Short Term Money \u2013 Bank Fixed Deposit or Liquid Fund or Savings bank Account?"},"content":{"rendered":"

There are times when you are very close to your financial goal and want to park your money for short term<\/strong> somewhere where it\u2019s safe<\/strong>, it can easily be withdrawn<\/strong> and in the meantime get some reasonable returns<\/strong>. Here I am considering short term as less than 1 year investment horizon. There are three options to park your money for short term:<\/p>\n

    \n
  1. Savings Bank Account<\/li>\n
  2. Fixed Deposit with Banks or Post Office<\/li>\n
  3. Liquid Funds with Mutual Funds<\/li>\n<\/ol>\n

    We would analyze these options one by one.<\/p>\n

    Saving Bank Account:<\/h2>\n

    This is the default option. Whenever you withdraw your investments most of the time money directly comes to your savings account. So it\u2019s the most convenient option. You can withdraw anytime you want.<\/p>\n

    But is Saving Bank Account the best place considering the returns front?\u00a0It depends on the interest your bank is paying on your savings account and the amount of money involved.<\/p>\n

    The Saving Bank Account interest rate<\/a> varies from 4% to 7%.<\/strong><\/p>\n

    Fixed Deposit with Banks or Post Office:<\/h2>\n

    This is also easy option execution wise. If you have online banking, most of banks offer facility to do an online fixed deposit. So you can select the desired tenure and do an online FD.<\/p>\n

    Rate of Interest<\/a>: 7% – 9.75% by different banks<\/strong><\/p>\n

    Liquid Funds with Mutual Funds:<\/h2>\n

    For those who are not familiar with Liquid funds<\/strong>. Here is a brief \u2013 Liquid Funds come under the category of debt schemes offered by Mutual Funds. The basic objective of a liquid fund is to manage the short term cash surplus of investors and provide optimal returns with moderate levels of risk and high liquidity. Liquid Funds generate income primarily through interest accrual by investing in money market instruments like Commercial Papers, Certificate of Deposits, CBLO\/ Repos and in short term debt instruments of corporate and NBFCs.<\/p>\n

    The investment process may not be as easy as bank FD as you would either need a demat account or invest online through respective mutual fund website or through some agent. Also you need to have KYC in place before investment.<\/strong> Also the liquidity is not as good as Savings account or FD which are instant. In case of liquid fund redemption it generally takes a day or two.<\/p>\n

    Returns: According to valueresearch the return in last 1 year varied from 7.05% to 10.45% with category average of 9.01%<\/strong><\/p>\n

    Now that we have checked out returns and liquidity let\u2019s look at the taxation part.<\/p>\n

    Taxation:<\/h2>\n

    In case of Savings account interest upto Rs. 10,000 per year is exempted from income tax<\/a>.<\/strong> After that the interest income is added to your income and taxed according to tax slab you fall in.<\/p>\n

    In case of fixed deposit the entire interest income is taxable.<\/strong> So total interest would be added to your income and taxed according to the tax slab.<\/p>\n

    Growth schemes of Liquid Funds are taxed as follows:<\/strong><\/p>\n

      \n
    1. Short Term Capital Gains<\/strong> (profits realized on a holding period of under one year) \u2013 It is added to your taxable income and taxed at your marginal rate of tax<\/li>\n
    2. Long Term Capital Gains<\/strong> (profits realized on a holding period of over one year) \u2013 Taxed @ 20.0% with indexation and @ 10.0% without indexation (surcharge and education cess applicable)<\/li>\n<\/ol>\n

      Now we know all the facts about returns and taxes let\u2019s do some calculations about which is the best instrument to park your short term money.<\/p>\n

      Comparison: Saving Account, FD, Liquid Fund<\/h2>\n

      \"Saving<\/a><\/p>\n

      Which is best option?<\/h2>\n

      For Calculation we make the following assumptions for returns:<\/p>\n\n\n\n\n\n\n
      Short Term Options<\/strong><\/td>\nLess Than 1 Year<\/strong><\/td>\n1 Year +<\/strong><\/td>\n<\/tr>\n
      Savings Bank Account<\/td>\n6.0%\/7.0%<\/td>\n6.0%\/7.0%<\/td>\n<\/tr>\n
      Bank Fixed Deposit<\/td>\n8.5%<\/td>\n9.5%<\/td>\n<\/tr>\n
      Liquid Fund<\/td>\n9.0%<\/td>\n9.0%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      The table below shows the returns post tax when you invest Rs. 1 lakh and Rs. 5 Lakh for 6 months and 1 Year 1 day.<\/p>\n

      The cells with best returns are shaded in green.<\/em><\/p>\n

      \"Saving<\/a><\/p>\n

      The significant points to note are:<\/strong><\/p>\n